Will My Personal Injury Settlement Be Taxed?
After you’ve suffered a catastrophic injury, every dollar counts when you are trying to pay your medical bills, plan for future expenses, and cover any lost wages from being out of work. This is why advocating for the highest possible settlement offer or jury verdict is of the utmost importance. But another question that many accident victims have during the claims process is how getting a big settlement will impact their taxes.
Is My Settlement Considered Taxable Income?
You may be surprised to hear that in the state of Massachusetts, your settlement is not considered income, and any money you receive in a personal injury claim will not be taxed on either a state or federal level. In general, this means that you will receive your settlement without any taxes being taken out of it and can use it to pay for your medical expenses, lost wages, and future care.
However, there are exceptions that you should be aware of. While the bulk of your award will not be taxed, you may need to report certain damages, interests, and expenses on your tax return.
Do I Need to Report My Settlement on My Taxes?
The answer depends on what types of damages you are awarded, but, in most scenarios, no. Because your settlement is not considered taxable income, you do not have to report it on your taxes except in these situations:
According to the IRS, you do not need to report compensation for medical bills on your tax return unless you took a medical expenses deduction during the year that you were injured. For example, if you had to pay certain medical expenses out-of-pocket while waiting for your claim to be settled, you have the option of applying those deductions on that year’s taxes. If you did take this deduction, then you will need to report the amount of compensation you received for those expenses on your taxes as “Other Income” on line 21 of Form 1040, Schedule 1, per the IRS.
If you did not take this deduction, then you do not have to report your settlement on your taxes.
In the state of Massachusetts, plaintiffs can receive compensation for both their financial losses, including medical bills and lost wages, and personal costs, such as pain and suffering and emotional distress. Based on IRS guidelines, if you suffered emotional distress due to a personal injury, you do not have to report these damages as income.
The exception only comes into play if your emotional distress was not caused by a physical injury or illness. This is more common in cases of employment discrimination or breach of contract; otherwise, damages related to emotional distress in personal injury claims are not taxed.
In some cases, such as with child injury claims, settlements can be placed in trusts that can accrue interest until the plaintiff is eligible to receive the full amount. It is also possible to receive “pre-judgment interest” in a personal injury trial in addition to a jury verdict. While the settlement itself is not taxable, this interest can be taxed and should be reported under “Interest Income” on line 2b of Form 1040.
Punitive damages are typically awarded in jury trials as a way to punish the defendant rather than reward the plaintiff. Unlike civil compensation, punitive damages are taxable and should be included under “Other Income” on line 21 of Form 1040, Schedule 1.
Wrongful Death Claims
Wrongful death claims follow several different rules when compared to personal injury claims, and the same goes for taxes. For the most part, most damages in wrongful death claims are not taxable, such as medical expenses prior to the deceased’s death. However, if the deceased’s estate is awarded punitive damages, lost wages, or interest, then those damages must be reported.
What About State Taxes?
With regard to personal injury claims, Massachusetts state tax laws follow the same guidelines as the federal government, which means your settlement will likely not be taxed under state law other than in the cases of the specific exceptions listed above.
All of this can become incredibly confusing to worry about while filing your claim and dealing with your injuries. However, if you work with DiBella Law Offices, P.C., our skilled Boston personal injury attorney can walk you through the legal process and explain how state and federal taxes can impact your claim. To discuss your case in a free consultation, call our office at (617) 870-0907.