25 November ,2014 By Admin Category:Personal Injury

An experienced and aggressive attorney can help you win or negotiate a large settlement if you were injured due to the negligence of another. Frequently, the threat of a lawsuit is all it takes to get the defendant to settle out of court, and a trial isn’t even necessary. Other times, the personal injury case goes to trial, and that is when a skilled attorney does his or her work in Court.

Whether your personal injury case is settled out of court, during the trial, or by the verdict of a judge or jury, the most important part is getting the money you deserve. Once the money is in your hands, the question becomes: How much is the government going to take in the form of taxes? Is my personal injury settlement taxable?

The simple answer is – “It Depends.”

Different Type of Personal Injury Damages

To understand what is taxable and what is not in a personal injury settlement, it helps to have a clear understanding of the types of damages you are eligible to receive. The first type is known as compensatory damages. Compensatory damages constitute remuneration for the actual physical injury and the costs incurred due to it. There are two types: special damages and general damages. Special damages cover costs such as medical bills and treatment costs. General damages cover matters relating to pain and suffering as a result of the physical and emotional injuries suffered because of the incident, and/or lost earnings.

On top of compensatory damages, many plaintiffs in personal injury cases are also awarded punitive damages. Punitive damages are a financial award to the injured party levied as a punishment to the person, persons, or entity responsible for the injury. They are more common in cases in which criminal behavior, malfeasance, or gross negligence were determined to have caused or contributed to the injury, rather than simple negligence or an honest mistake.

Personal injury plaintiffs typically are also awarded the interest on their settlement balance that accrues between the date the case was initially filed and the date the judgment was rendered. So, if a plaintiff files a personal injury suit in January of 2014, but a settlement is not reached until January 2015, that year’s worth of interest is often awarded to the plaintiff.

Personal Injury Settlements Taxable or Not?

Compensatory damages in personal injury cases, as a general rule, are not taxable by the Federal or state governments. One exception, in certain states such as California, is compensatory damages for lost wages. The reason is because some states consider this to be a substitute for wage income, which is always taxable. However, compensation for medical bills, pain and suffering, and attorneys’ fees related to the injury itself are not included in your federal or state taxable income.

On the other hand, punitive damages are taxable by both the Federal government and most states, as is accrued interest awarded to the plaintiff.

Therefore, when you reach a settlement on your personal injury case, it is very important that the damages be broken down by category and stipulated very clearly in the settlement agreement. You want as much of the settlement as possible to be classified as compensatory damages, for obvious reasons: This is money that, by and large, Uncle Sam will not be able to get his hands on.

A skilled personal injury attorney will not only help you extract the largest award possible from your personal injury claim but can ensure that the settlement is structured to where as much as possible goes to you and as little as possible is paid towards taxes. It is very important to have an understanding and experienced attorney on your side to save you important tax dollars. Contact The Law Office of Henrik Karapetian for a free consultation on your injury claim and see what we can do for you.