If you are working with a Riverside personal injury lawyer to obtain a settlement, you may be wondering about the tax consequences for any award you receive. The good news is that, most of the time, settlement awards for these types of lawsuits are not considered taxable income. Some exceptions do apply, however. Settlements often include compensation for multiple types of awards, so it is important to understand what your settlement award actually covers. Here is a brief primer to help you understand which types of settlement awards or court judgments are subject to income tax.
Awards Generally Not Considered Taxable Income
In general, you will not be subject to taxation when you are compensated for injuries, illness, or property damage. The purpose of these types of settlement awards is simply to restore you to the position that you were in before your accident. Therefore, from a tax perspective, you are not earning income or profits by collecting these compensatory awards. A Riverside personal injury lawyer can explain to you whether your settlement includes these specific types of damages. Compensation for property damage is perhaps the most straightforward example of a non-taxable settlement. Examples of property damage might include a damaged or totaled car following an automobile accident, real estate damaged through someone else’s negligence, and any personal items that are damaged in either scenario. In the case of an automobile accident, you may also be entitled to collect compensation for property damage for any rental car you required following your accident. Settlements for property damage in a personal injury lawsuit will not be subject to tax. Compensation for illness and injury can be slightly more complex. These costs may include medical expenses, rehabilitation, and any other costs you paid or incurred to treat the injury or illness that arose from the accident. These costs can also include compensation for pain and suffering, and even emotional distress that arises as a result of your injury or illness. Again, this type of compensation is generally not taxable, with one exception. Certain emotional distress claims that are independent of an accident-related injury or illness may be subject to tax. Contact a Riverside personal injury lawyer if you have a question about your emotional distress claim.
Awards Generally Considered Taxable Income
The above examples describe the most common types of settlement awards for personal injury claims. However, depending on your claim, you may also receive other types of compensation that count as part of your overall taxable income. These awards fall into two general categories: lost wages and punitive damages. You may receive compensation for lost wages if you had to miss work because of the injury or illness you suffered in your accident. If you receive this type of award, you will be entitled to the equivalent of any salary or wages, including tips, that you lost during your recovery period. If you had continued working, you would have been required to pay taxes on your normal wages. For that reason, when you receive a settlement for lost wages, you must also pay taxes on that portion of your award. A Riverside personal injury lawyer can explain your settlement breakdown, including which portion of your settlement, if any, is devoted to lost wage compensation. Punitive damages are a less common type of settlement award intended specifically to punish defendants for acting negligently or recklessly. These awards occur most commonly where a judge or jury wants to discourage a defendant from behaving similarly in the future, and the award amounts can thus be quite large. Because these awards are really directed at punishing the defendant, rather than restoring you to your pre-accident state, punitive damage awards are generally considered taxable income.
Contact a Riverside Personal Injury Lawyer
The tax code is complicated, and your individual tax liability depends on a number of factors including the type of settlement you receive. A Riverside personal injury lawyer can help explain your settlement to you, including which parts of your settlement are dedicated to particular types of compensation. If necessary, your personal injury lawyer can also refer you to a tax specialist to help you understand your tax liability. For further assistance, contact a Riverside personal injury lawyer at Russell & Lazarus, APC, at (800) 268-9228.