Taxes might not be the first thing that comes to mind if you got a settlement for a personal injury. But you should know how the IRS treats settlement payments and what taxes they might have. In most cases, injury settlements aren’t taxed, but the specifics of your case can affect whether or not your settlement is taxed.
What Taxes You Have to Pay on Settlements for Personal Injury
Settlements for physical injuries or illness are usually not taxed by the IRS. This means that money you get for pain, suffering, and emotional distress that comes from a physical injury is not usually taxable. There are some exceptions, though, and the type of settlement can change how taxes are applied.
If your settlement includes money for lost wages or punitive damages, you may have to pay taxes on these amounts. The IRS says that lost wages are income, so you have to pay taxes on them. The IRS also taxes punitive damages, which are meant to punish the defendant instead of pay the plaintiff.
Payment for a settlement and IRS rules
The IRS handles personal injury claims in different ways depending on the specifics of each case. You might have to count part of the settlement as income if it is meant to pay you back for medical bills that you already claimed on your taxes. You got a tax break on your medical bills in the past, which is why this happened.
Keep in mind that every injury claim is different, and the taxman will treat a settlement differently depending on its parts. You can be sure that you follow all of the IRS’s rules and don’t get any extra tax bills if you work with a tax professional or lawyer.
Questions that are often asked
Q: Do you have to pay taxes on money you get for an injury?
Most of the time, you don’t have to pay taxes on money you get for physical injuries. But the IRS may tax any part of the settlement that is for lost wages or punitive damages.
Q: Which parts of a personal injury settlement are subject to taxes?
Most of the time, lost wages and punitive damages are taxable. Some parts of the settlement that pay for medical bills that have already been taken out of taxes may also be taxable.
Q: What does the IRS think about settlements for injuries?
The IRS doesn’t usually tax money you get for getting hurt, but some types of damages, like lost wages or punitive damages, may be taxed.
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