These cookies will be stored in your browser only with your consent. Get Your Questions Answered and Schedule Your Free Consultation, © Copyright 2020 - Elkus & Sisson - All Rights Reserved, How Personal Injury Settlements are Taxed, Motorcycle Insurance Laws in Colorado: Everything You Need to Know, 5 Common Types of Personal Injury Cases in Colorado, Pros and Cons of Hiring a Personal Injury Attorney, Colorado Personal Injury Law: Know Your Rights, How to Prepare for a Divorce Attorney Consultation, 5 Helpful Tips to Protect Yourself When Your Spouse Files for Divorce. It doesn’t matter if you went to trial and won a verdict. However, this general exclusion from taxation only applies to the compensatory damages you receive as restitution for the expenses incurred as a result of your bodily injuries or physical illness. A personal injury settlement can be non-taxable, partially taxable, or fully taxable dependent upon the type of case and compensation. However, if you had just installed a new sound system worth $2000, the adjusted basis would be $38,000.00. During the appeal process, interest accrues on the original judgment. Other rewards are taxable. Welcome! However, it has long been established that loss of earnings claims are exempt from income tax. And “his” obviously includes all genders. Free Case Consultations. Your lost income in other cases may be taxable. The rationale for generally excluding compensatory damages from taxation is that the money you receive as restitution for these harms and losses are intended to make you whole, or to, in effect, pay you back for the damages you were forced to endure as a result of the accident. on a prior year’s taxes, you would still need to report the tax benefit as “Other Income.” However, according to the Small Business Job Protection Act passed by Congress in 1996, “emotional distress shall not be treated as a physical injury or physical sickness.” So, unless your emotional distress claim is directly related to a strictly “physical” injury, it’s taxable, under Internal Revenue Code § 104(a)(2). Your lost income in a personal injury case is generally not taxable. In order for your personal injury award to be non-taxable, your compensated losses must stem from a physical injury. Is money made from investing your compensation payments taxable? As mentioned earlier, if you opted to deduct the cost of medical expenses from your taxes the previous year, you are obligated to include that portion of the proceeds as taxable income. Lost Wages Are Not Taxable If Caused By Physical Injury. These cookies do not store any personal information. You would have to pay taxes on $2000.00. For example, let’s say you were injured in a motorcycle accident and suffered broken bones, internal injuries, road rash, and other contusions. It is a common concern for individuals involved in a personal injury claim as to whether or not any financial compensation awarded in court, or in an out of court settlement, will be taxable. The $100,000 award for compensatory damages is generally excluded from federal taxation (though, as mentioned earlier, if you deduced these expenses in the prior tax year, you may owe taxes). You may have been in extreme pain for several months, and suffered emotional distress and mental anguish due to the extent of your injuries. Whether or not your claim is taxable depends on if there was a physical injury or physical sickness. Any lump-sum personal injury compensation payment in Queensland (such as workers compensation or motor vehicle accident payments) are not taxable. We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. In that case, you do not need to report your pain and suffering compensation amount as income. This means if you receive money to compensate you for emotional distress, anxiety, and other "pain and suffering" damages, you could be forced to pay taxes on the financial recovery. If you think that sounds like double dipping, you’d be right. 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