Most personal injury cases are settled before an actual trial takes place. This is because the insurance company makes an offer and you accept it. Also, a Detroit personal injury lawyer might have negotiated a better deal for you and you accepted that. Regardless of what actually happened, after your personal injury claim is successful, you naturally think about paying taxes. Is this actually a case?
Generally speaking, how much you receive from the personal injury claim is usually not taxable. This is true for both state and federal law. It does not matter if the case was settled in court or before it reached that state. The IRS and the state cannot tax you. Also, damages received because of physical sickness and personal injuries are not included in the gross income you have to pay taxes for.
Typically, the payments you receive are given as a compensation for various things like emotional distress, lost wages, suffering, pain, attorney fees, loss of consortium, and medical bills. All this is good news for you since most cases are just like this. They are straightforward and you do not have to worry about taxes.
As expected though, there are some exceptions that appear. Although you might have suffered a physical sickness or an injury, it is possible to have to pay taxes on the damages that are related to contract breaches or when contract breaches led to the injury. This applies when the lawsuit’s basis is a breach of contract.
What you should remember is that punitive damages will always be taxed. Punitive damages claims see your lawyer asking a jury or a judge to separate verdicts into punitive damages and compensatory damages. This is done in order to have a proof for the IRS that a part of the money you received was meant to cover compensatory damages. These will not be taxed.
You will also need to pay taxes for judgment interests. In most states, courts can add interest to verdicts. This cover the timeframe in which the case was pending.
Emotional Injury Claims
You only avoid paying taxes when the settlement appeared because of physical injuries. When your claim includes a request for compensation for employment discrimination or emotional distress and there is no physical injury present, the settlement is taxable. The situation when this is not true is when you can prove that there was some physical injury that appeared because of the action of the party at fault.
What You Should Do
Because taxes can reduce how much you will receive, you need to do all that you can so that a larger part of the settlement is non-taxable. There are cases in which you have more claims than one. When this happens, you want to be offered more through the personal injury claim than what you receive from the other claims. In a settlement agreement, it can be stated what percentage is related to the injury and how much is non-personal injury-related. An experienced attorney can easily help you deal with this need to draft a proper settlement agreement.