Tax season is here, and that means it’s time to settle your account with the IRS (or file for an extension). If you received money from a personal injury claim last year, you might be wondering whether you’ll need to pay tax on a personal injury settlement. The answer isn’t always straightforward, even in a state like Nevada, which doesn’t have a state income tax. To help you prepare for tax filing, the Las Vegas personal injury lawyers at ER Injury Attorneys break down which parts of a settlement are taxable and which are not.
Understanding the Tax Implications of a Personal Injury Settlement
Tax season can be a stressful time, especially if you’ve received a personal injury settlement in the past year. You might be wondering: Do I have to pay tax on a personal injury settlement? To help you navigate this complex topic, here’s a breakdown of what’s generally taxable and what’s not when it comes to personal injury settlements.
Parts of a Personal Injury Settlement That Are Typically Not Taxable
1. Compensation for Physical Injuries or Sickness
The majority of personal injury settlements are not taxable if they are tied to physical injuries or sickness. This includes:
- Medical expenses (e.g., hospital bills, surgeries, medications)
- Pain and suffering directly related to the physical injury
- Other damages that stem from the physical harm you endured
The IRS excludes these amounts from taxable income because they are intended to compensate you for losses, not to provide a financial gain.
2. Emotional Distress Related to Physical Injury
If your emotional distress is a direct result of a physical injury, the compensation you receive for it is generally not taxable. For example, if you experienced anxiety or depression due to a car accident or workplace injury, that portion of your settlement would likely be tax-free.
Parts of a Personal Injury Settlement That May Be Taxable
While much of a personal injury settlement is tax-free, there are exceptions. Here are the portions of a settlement that could be subject to taxes:
1. Punitive Damages
Punitive damages are awarded to punish the defendant for egregious behavior, rather than to compensate you for your losses. These damages are almost always taxable.
2. Lost Wages
If your settlement includes compensation for lost wages or lost earning capacity, that portion is typically considered taxable income. This is because wages are normally subject to income tax, and the settlement is essentially replacing what you would have earned.
3. Interest
Any interest that accrues on your settlement amount while it’s being processed or held is usually taxable. For example, if your settlement took months to finalize and earned interest during that time, the interest portion would be subject to taxes.
4. Emotional Distress Not Related to Physical Injury
If your emotional distress is not connected to a physical injury, the compensation you receive for it may be taxable. For instance, if you were awarded damages for emotional distress due to defamation or harassment, that portion of the settlement could be subject to taxes.
5. Medical Expenses Previously Deducted
If you claimed a tax deduction for medical expenses in a prior year and are later reimbursed for those expenses through a settlement, the reimbursement may be taxable. This is to prevent “double-dipping,” where you benefit from both a tax deduction and tax-free reimbursement.
Contact a Las Vegas Injury Lawyer
Receiving a personal injury settlement can provide much-needed relief after a difficult experience. The Las Vegas injury lawyers at ER Injury Attorneys hope that this blog has given you a better understanding about tax on a personal injury settlement. By understanding the tax implications and seeking professional guidance, you can ensure that you keep as much of your settlement as possible and avoid unexpected tax liabilities.
Naturally, you should consult with your accountant or tax preparer to get help with your specific financial situation. Should you suffer any injuries in a Southern Nevada accident, please know that ER Injury Attorneys is available to help you 24 hours a day, 7 days a week.
You can reach ER Injury Attorneys by phone at 702-878-7878 and online through LiveChat or secure contact form. Our Southern Nevada injury lawyers have recovered outstanding settlements for clients in Las Vegas, Henderson, Summerlin, Pahrump, Boulder City, Laughlin, and beyond. Contact us today and take the first step towards the settlement you’re entitled to.