Posted in Personal Injury on January 27, 2023
Good news – Most personal injury settlements are non-taxable at both state and federal levels. That makes a huge difference for injured people who racked up medical bills while being unable to work.
However, most does not mean all. There are some exceptions to the non-taxable settlement rule, which we’ll explore below.
Injured and wondering how you’ll pay your bills? Zaner Harden Law is ready to provide tenacious representation and get you the compensation you need to move forward. Call (720) 613-9706 or contact us online to schedule your free consultation.
The settlement or award in a personal injury case is a type of compensation called “damages.” These damages are awarded to the injured person in order to make them “whole” by repaying them for the financial losses, physical, mental, and emotional pain, and the long-term effects of their injuries that were caused by someone else’s negligence.
Because you’re being reimbursed for your injury and are not being paid for your labor, taxes cannot be collected on your settlement.
You earned the settlement by filing a legal claim against a liable person, and in the words of the IRS, assets can be taxed, but not liabilities.
Damages are generally broken down into three categories: economic, non-economic, and punitive.
Economic and non-economic damages are commonly awarded in Colorado, whereas punitive damages are reserved for instances of extreme misconduct. Both economic and non-economic damages are generally non-taxable, save for a few exceptions.
The non-taxable damages you’ll receive may include the following.
This includes bills for the treatment you’ve received and that you’ll receive in the future such as surgical procedures, hospital stays, and medications.
They can also include other types of medical damages such as rehabilitation, chiropractic care, and massage therapy, so long as that treatment was related to the injury you suffered in the accident.
If any of your personal property was damaged in the accident, your settlement may include reimbursement for the repairs or fair market value of the item if it couldn’t be repaired.
Again, this is a reimbursement to you for something that was lost in the incident that caused your physical injuries, so it’s generally not taxed. There are some instances where a portion of the property damage or loss in property value of your settlement might be taxable, such as if the amount you received was greater than the adjusted basis of the property.
Your Denver personal injury attorney can help you determine if this IRS exclusion applies to a portion of your settlement.
If your injuries required you to hire people to handle some of your household chores or to assist you with tasks such as mowing your lawn, cleaning your home, or cooking your meals, those additional expenses could be included in your settlement.
Your settlement might also include necessary accessibility modifications to your home due to the limitations caused by your injury. Because these types of expenses were incurred as a direct result of your injury, they won’t be considered taxable income.
If part of your settlement was for pain and suffering, mental anguish, or emotional distress that was caused by or is related to your injury, then it won’t be taxed by either the IRS or the state.
Punitive or exemplary damages can only be awarded when the case goes to trial. Rather than compensating the injured person, these damages are meant to punish defendants for particularly egregious behavior and negligence and to deter others from engaging in the same behavior.
Punitive damages are rarely awarded, but when they are, they can be much higher than economic and non-economic damages. Because these aren’t compensating or reimbursing the injured person, it’s considered a windfall.
It’s common for someone to deduct the costs of their medical treatment on their tax return while their personal injury case is pending. Although medical expenses received as part of a personal injury settlement aren’t taxable, the amounts that were deducted on a previously filed tax return are because you already received a benefit for those expenses.
A jury may award you a sum of money, but the defendant could then appeal their decision. During the appeals process, the award will accumulate interest.
Because this interest is in addition to your settlement award, it’s treated as taxable income.
If you’ve been injured and think you might have a valid case, contact the Denver personal injury attorneys at Zaner Harden Law as soon as possible.
We have a long track record of success in these cases, and you can rest assured we’ll do everything we can to make sure you obtain the full and fair compensation you deserve.
Please use our online form or call (720) 613-9706 for a free case review.