Is your personal injury settlement taxable by the IRS or the state of California? In short—your recovery from a personal injury case is not taxable. That’s just the way the law is set up. Most times, you don’t even have to report your settlement to the IRS, but as with almost anything in life, there are some exceptions.
Medical Bills & Expenses
Medical expenses usually make up the largest portion of a personal injury settlement, and reimbursement is usually not taxed. However, if you claimed the medical bills on your tax return, you might be required to pay taxes on a portion of your settlement.
Any money intended to reimburse you for lost wages can be taxed as income because your wages would have been taxed had you not been injured. The IRS has the right to impose taxation of your award as it sees fit.
Emotional Distress and Mental Anguish
In addition to compensation for the physical pain and suffering, you may also receive compensation for your mental anguish and emotional distress. The compensation for emotional distress and mental anguish is usually not taxable if the distress and anguish are caused by a physical injury or illness sustained in the accident. If your claim does not include a physical injury or illness, the compensation for emotional suffering and mental anguish may be considered taxable income.
According to the IRS, compensation for property damages is not taxable unless the amount you receive is more than the adjusted basis of your property. Amounts over the adjusted basis can be taxed as income.
Interest and Punitive Damages
Interest and punitive damages are not very common; however, some claims may qualify for these types of compensation. If so, you are required to pay taxes on this compensation because interest and punitive damages are considered income for tax purposes.
If you have been injured in an accident, contact our Orange County personal injury lawyers at Law Office of Marshall Silberberg today to learn more.Call (949) 565-4281 or contact us online.