If you received a settlement for a personal injury within the last year, part or all of it could be tax free. Section 104(a)(2) of the Internal Revenue Code provides that any damages received on account of personal physical injuries or physical sickness are not included in gross income. This means compensation received for damages “on account of” a personal physical injury or sickness is not taxed. Unfortunately, not all personal injury damages are considered “on account of” a personal injury. This probably sounds confusing. So, I have provided a breakdown of which damages are usually taxable and non-taxable. If you need more information on the different types of recoverable damages, click here or Call or Text (214) 699-6524.
Medical Expense & Pain and Suffering
Generally, medical expenses and pain and suffering are not taxable and you do not need to include them in gross income. The only exception is if you took an itemized deduction for the medical expenses in a prior year.
Emotional Distress & Mental Anguish
Emotional distress and mental anguish are a little more confusing. If your distress or anguish was directly related to an injury, they are treated the same as medical expenses. However if you received a settlement for emotional distress or mental anguish and did not have an injury, then this compensation is taxable and should be included as “Other Income” on a Form 1040.
Lost Wages
Normally, lost wages are not taxable. In Texas, Plaintiffs are entitled to recover the amount of their lost wages after taxes have been take out. Thus, it would not be included in gross income.
Punitive Damages
Punitive damages are taxable and should be reported as “Other Income” on a Form 1040. However, there are exceptions in certain wrongful death circumstances.
Interest
Generally, interest on any settlement is taxable and should be reported as “Interest Income” on a Form 1040.
If you have been injured in a car accident, it is important to contact a car accident lawyer to properly evaluate your case. If you think I can help, give me a Call or Text at (214) 699-6524 or email me at [email protected] for a free case evaluation.
Important Note: Andrew J. Wooley is not a tax attorney. He primarily practices in personal injury law. If you have any questions regarding taxes, we advise that you contact a local tax attorney.