If you or somebody you love has been injured due to the careless or negligent actions of another person or entity, you may be entitled to compensation through a personal injury lawsuit. These cases can be incredibly confusing, and the Philadelphia personal injury lawyers at the Ciccarelli Law Offices want to discuss whether or not you will be required to pay taxes on any settlement you receive.
Taxes on Settlements
One aspect of personal injury settlements that many people do not consider is whether or not they will need to pay taxes on the final settlement amount. However, most people are acutely aware that the Internal Revenue Service (IRS) always wants its share of the money that we receive.
There is good news when it comes to taxes and personal injury settlements. The IRS does not tax personal injury awards settlements or jury verdict awards. The IRS considers settlements in cases that involve “observable bodily harm” as non-taxable. This includes compensation that is awarded for emotional distress that arises due to the physical injuries.
However, if punitive damages are awarded in a personal injury case, meaning the conduct of the negligent party was egregious or intentional, then these damages are taxable by the IRS. Punitive damages will be treated as ordinary income.
Non-Personal Injury Lawsuits
If you file a lawsuit against somebody for something that does not involve a personal injury, for example, a lawsuit for discrimination or to collect compensation for breach of contract, then any settlement or jury award you receive will generally be taxable as ordinary income. The following items will typically count as ordinary income, and will be taxed by the IRS:
- Interest on any award or settlement compensation
- Coverage for any lost wages or lost business opportunities
- Punitive damages awarded (for personal injury or non-personal injury cases)
- Pension rights settlement cases
- Damages for copyright infringement or patent violations, interference with business operations, or breach of contract cases
- Back pay or damages associated with emotional distress for Title VII cases
What about the amount paid to the attorney?
In many cases, attorneys will work on a contingency fee basis. This means that all legal fees will be deducted from the final settlement awarded. In these cases, the plaintiff will pay applicable taxes on the entire amount awarded, not just the amount they receive after their attorney is paid.
Anytime you are expecting to receive a settlement or a jury verdict award in the aftermath of a successful claim or lawsuit, you should consider working with a certified financial advisor or accountant to assist you with tax issues.
If you or somebody you love has been injured due to the negligent or careless actions of another person or entity, contact the Ciccarelli Law Offices as soon as possible. Our team has the experience and knowledge you need to handle every aspect of your case. We will conduct a full investigation into the incident that caused you harm and work to secure maximum compensation on your behalf. When you need an attorney, you can contact us for a free consultation of your case by clicking here or calling 215.228.0100.