Imagine you are driving to work one day when someone in a rush speeds through a red light and t-bones your car. The accident was undeniably their fault. You were driving at the speed limit, were obeying all traffic laws and proceeding legally through the intersection when the collision occurred. Still, your vehicle was severely damaged and you wound up with a concussion after hitting your head against the driver’s side window. You contact the legal team at Karns & Karns, and we are able to negotiate a settlement that covers the entirety of your vehicle’s damage, all of your medical bills, and extra to compensate you for your pain and suffering and future losses.
But what are the tax implications of your settlement? Most citizens are terrified of accidentally committing tax fraud. Not only is it immoral, but it can have a massive impact on your financial future. Generally speaking, the good news is that the compensation you receive from personal injury settlements is not taxable at either the state or federal level. Nine times out of ten, you will collect your funds and not think about it again.
That being said, there are a few notable exceptions to the rule. If your settlement meets one of the following conditions, those funds will be taxable:
- If the physical injury or sickness you sustain were related to a breach of contract and if the contract’s breach is the basis for your lawsuit.
- The damages you collect were punitive, meaning that they were intended to create a financial strain for the party at fault.
- Any interest you have been paid while the trial is ongoing.
- If your claims are based on emotional injury only.
In some cases, parts of your settlement will be taxable, while others will not. It can get confusing quickly. To make sure that you are handling your settlement appropriately per both your state and federal government, make sure to consult with your legal team.
Personal injury lawyers will be able to either advise you on how to pay taxes on your settlement or will be able to refer you to a finance professional for guidance. At Karns & Karns, we will make sure that you understand how to best handle the settlement money we secure for you.