Do you have to pay taxes on settlement money? One of the most important things to know is that the IRS does not tax your personal injury settlement in Virginia. The money from a personal injury case is considered compensation for your losses rather than income. Therefore, any settlement awarded for physical injuries is always exempt from federal and state taxes. However, certain types of damages may be taxable.
Additionally, settlement money recovered for emotional distress is not taxable if the distress stems from a physical injury. The same applies to hospital and medical expenses.
However, if the compensation you receive for emotional distress or mental anguish does not originate from a physical injury or illness, you must report these damages to the IRS. You may, however, deduct medical expenses paid for treating emotional distress.
Since tax laws regarding settlements can change, it’s crucial to discuss your case with a personal injury attorney before settling. Learn more about filing personal injury lawsuits in Virginia and how our personal injury attorneys at Marquis Law Group can help you build a strong case.
Lost Wages and Income Awards Are Taxable
If your settlement includes money for missed work, lost business profits, severance pay, or back pay, these amounts are subject to ordinary income tax. If you are self-employed, this income must be reported on line 21 of Form 1040 under “business income.”
Deducted Medical Expenses
Medical costs are usually a big part of personal injury settlements. If you spread these costs over multiple years, you must allocate the proceeds proportionally to the years the expenses were incurred. If you previously deducted these medical expenses from your taxes and later received compensation for them, you may need to reimburse those tax benefits.
Punitive Damages
The court awards punitive damages to punish the defendant’s reckless or egregious behavior, which is relatively rare in personal injury cases. However, if you receive punitive damages, they are subject to federal income tax.
Interest Earned on Settlements
Any interest or dividends earned from a personal injury settlement is taxable, regardless of the settlement’s source. Large lump-sum settlements can generate significant interest income. Consulting with a personal injury attorney about structuring your settlement to minimize tax consequences is smart. Sometimes, a structured settlement with smaller, periodic payments may be more beneficial.
Contact Us at Marquis Law Group for a Consultation
There are various strategies to minimize the tax impact of your personal injury settlement while remaining compliant with tax laws. Thoughtfully allocating your damages can be advantageous, but every case is unique.
For additional guidance, contact our team of personal injury lawyers at Marquis Law Group. Call us at 703-777-6161 to schedule a consultation today.
