Decoding the Tax Implications of Personal Injury Settlements

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Receiving a personal injury settlement following an accident can be a welcome relief, helping you cover medical expenses, make up for lost income, and regain your financial footing. However, the potential tax consequences of your award might weigh on your mind. In Virginia, personal injury settlements are typically tax-exempt, but there are exceptions to this rule. In this article, one of our Virginia personal injury lawyers sheds light on the tax treatment of personal injury settlements.

The IRS and Personal Injury Settlements

The Internal Revenue Service (IRS) provides guidance on the taxation of personal injury settlements in IRS Publication 4345. As a general rule, the IRS does not impose taxes on personal injury settlements. This is because the IRS primarily taxes income, and personal injury settlements are designed to compensate you for your losses, not as a source of income. However, there are exceptions to this rule.

Taxable Components of Personal Injury Settlements

While personal injury settlements are typically not taxable, specific components may be subject to taxation:

  1. Punitive Damages: Punitive damages, which are awarded to punish a defendant for gross negligence or recklessness, are typically taxable. It’s essential to note that punitive damages are relatively rare in personal injury cases.

  2. Emotional Distress: The taxability of damages for emotional distress hinges on whether they are linked to a physical injury. When emotional distress directly stems from a physical injury, the damages are not taxable. Conversely, if emotional distress is not tied to a physical injury, the damages may be subject to taxation. The amount of taxable damages is adjusted by the medical expenses related to treating emotional distress and any prior medical costs deducted for mental anguish.

  3. Interest: Interest earned on a personal injury settlement is generally taxable. This interest often accrues on large settlements paid as lump sums. Placing your settlement in an interest-bearing account or making investments can generate taxable interest income.

  4. Previously Deducted Medical Expenses: If you have previously claimed medical deductions on your tax returns due to the accident, those deductions may become taxable once you receive your settlement.

Count on Our Virginia Personal Injury Lawyers to Mitigate Tax Consequences

After securing the personal injury settlement you deserve, it’s essential to protect your award from unnecessary taxation. At The Jackson Law Group, PLLC, our Virginia personal injury lawyers provide expert guidance to help safeguard your settlement from taxation and ensure you receive the full compensation needed to recover from your serious injuries. Reach out to us today via phone at (276) 200-5417 or initiate a chat with us online to request a free consultation and access the legal support you require. Your settlement should serve its intended purpose without being eroded by taxes.