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Will You Have to Pay Taxes On Your Personal Injury Settlement?

Will You Have to Pay Taxes On Your Personal Injury Settlement?

If you have sustained a personal injury, you’re not alone. Data collected by the National Safety Council (NSC) indicated that approximately 24,100,000 Americans had been unintentionally injured in an accident. Common causes of personal injuries in the United States include slip and fall accidents, car crashes, work related injuries, motorcycle accidents, dog attacks, and medical malpractice injuries.

If you’ve sustained a personal injury, the best thing you can do is contact a lawyer who will walk you through the steps you need to collect a settlement that will cover the financial imbalance created by the injury. A personal injury attorney will negotiate a pay out on your behalf and once the terms are agreeable, the case will be officially settled.

For most people the hardest part about this particular point is remaining quiet, but that’s exactly what you have to be. Don’t start celebrating until your lawyer lets you know that all the paperwork has been signed and that the other side can’t back out of the offer.

The next matter that has to be considered is taxes. The good news is that in most cases, your personal injury settlement isn’t taxable, however there are some exceptions and you’ll want to make sure your settlement isn’t one of those before you start spending it. One big exception is if there is any mention of a breach of contract, you will be taxed for any portion of the settlement that pertains to the breach of contract. In most cases, your attorney will try to arrange things so the breach isn’t mentioned.

While the portion of your settlement that covers medical bills and lost wages won’t be taxed, the portion of the settlement that covers punitive damages is. Make sure your attorney discusses the topic of punitive damages with the judge responsible for you case so they can draw up paperwork so that the part of the settlement that covers the punitive damages is completely separate from the portion that covers you compensatory damages. Having the settlement divided into two halves ensures that the government doesn’t get more than their fair share.

If there’s interest connected to your settlement, that interest is taxable, and since most judges tack on interest starting with the time that the case was first pending, it’s possible quite a bit could have accumulated by the time you finally gain access to the first payment.

There are many benefits to having an experienced personal injury lawyer helping with your case is that they will do everything in their power to make sure that the bulk of your settlement isn’t taxable. When they draw up the paperwork, they will be very careful to say what portion of the lawsuit covers personal injury as opposed to emotional stress.

The better your attorney is about drawing up the paperwork, the less arguing you’ll do with the IRS when they learn about your personal injury settlement.

 

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