An injury sustained due to the negligence of another party is often examined in personal injury cases. If an individual were to fall down a flight of stairs due to a faulty railing, that individual may claim the faulty railing was a result of the property owner’s negligence and may attempt to file a suit. If the individual wins the case, or a settlement is reached, that individual will often receive compensation for damages incurred during the accident. The money awarded in the settlement is often subjected to taxes. The amount awarded and the specific type of damage or damages will determine how much, if any, of the money is taxed. The government provides guidelines governing the portions of settlements subject to taxes, however, the rules may be considered convoluted to some. For those having difficulty comprehending the regulations, tax or estate lawyers may be able to help determine how certain laws will affect the taxes on the settlement.
An accident caused due to willful intent or extreme negligence, generally, will involve punitive damages as part of the settlement. Punitive damages exceed the general compensation and are awarded to the victim as punishment to the defendant. Because these damages are not specific to the suffering, loss, or injury to the victim, they are typically considered as income, and therefore, taxable. With the help of a Personal Injury Lawyer Fort Collins, CO locals recommend, victims may be awarded compensation for punitive damages.
In personal injury cases, compensatory damages are issued to account for any financial losses caused by the injury. Commonly, compensatory damages cover lost wages, medical costs, or other financial expenditures as a result of the accident. Though various tax stipulations may apply depending on the type of damage incurred as well as the treatment for the damage, in general, any compensation exceeding that value is considered taxable income.
-Compensation to account for property damages and loss-in-value of property that is less than or equal to the damages will not be taxable. If the compensation exceeds the value of the property or the damages, the difference is considered income and will be taxable.
-Awards received to account for lost wages are likely taxable. Compensation for wage loss damages are considered income, so it will typically be taxed as such.
-If an itemized deduction for medical and injury related damages was taken, then they may be taxable. If deductions were not taken, then taxes are not required for these damages.
If you are having difficulty calculating the taxes imposed on your settlement, contact an estate planning attorney. The attorney may be able to assist you in calculating what portions of the settlement may be taxed in order to keep you in compliance with IRS regulations.
Thanks to our friends and contributors from Cannon Hadfield Stieben & Doutt, LLC for their insight into personal injury and taxes.