An unusual tax season is wrapping up, with the deadline to file pushed back to July 15 due to the coronavirus pandemic. As residents of Illinois finish their taxes, they may be unsure how to count their personal injury awards or settlements. Or, perhaps you are getting ready to file a lawsuit and want to know how the IRS might treat your eventual damages.
Is any part of my personal injury award taxable?
In most cases, your personal injury award or settlement won’t be subject to federal taxes. That’s because most people who file lawsuits are trying to win compensation for losses, or damages, they’ve incurred. The goal of a personal injury lawsuit is to restore the victim to the financial, health, and property statuses they enjoyed before the accident or injury.
To the extent your award or settlement compensates you for physical injuries or property damage, it is generally not taxable. More specifically, these damages are tax-free:
- Medical bills. The reasoning here is that the money received for these expenses is not kept by the victim, but is used to pay doctors and others who treat injuries inflicted by the defendant. Again, the goal here is to return the plaintiff to the state they were in prior to the injury.
- Property damage. Victims often suffer damage to their automobiles, real, and personal property. The money received is simply designed to repair or replace property, thereby restoring the victim to their previous state.
- Pain and suffering, mental and emotional distress. These are not taxed only if they directly result from the injury. This is sometimes a muddled area of tax law, but a personal injury attorney can explain in detail the nature of this damage and its relation to your injury.
Your award or settlement may also contain taxable damages, and some of the most common ones are:
- Lost earnings. Personal injury victims often lose time from work due to hospitalization, follow-up treatments, and rehabilitation. Had you not been injured, you would have worked and earned this money anyway, so the IRS reasons that it should be taxed.
- Interest. Your payments may be delayed, during which time they can accrue interest. Some victims also place their awards into interest-bearing accounts. Even if your award itself is tax-free, the interest on top of it is essentially viewed as additional income, and is taxed.
- Punitive damages. This is subject to taxes because instead of compensating the victim, it punishes the wrongful party. These damages are not common, but you should understand their tax treatment.
- Pain and suffering, mental and emotional distress. As mentioned above, these are not taxed if directly related to your injury. Otherwise, they will be taxed.
Contact Hale & Monico Today
Obviously, you don’t want any surprise tax bills down the road. At Hale & Monico, our personal injury attorneys work to take the stress out of your case so you can get back to your life. We can also refer you to a tax professional if necessary.
Give us a call today to start working on your case.