Can Someone Be Taxed For A Personal Injury Settlement?

If someone with an accident injury files a claim and wins some money in the form of compensation, that money cannot be taxed, providing that the victim got compensate for a physical injury. The money won could be taxed, if the claimant sued for emotional distress or for employment discrimination.

Other times when money from a settlement might get taxed

While the law states that compensation for a physical injury cannot be taxed, that rule assumes that the injured victim has been in some type of accident, one caused by a negligent individual. There are other ways that an innocent person might get injured. For instance, such a person might have chosen to end a contract.

If someone elects to breach a contract and then that decision someone manages to cause an injury-making accident, any money won as compensation can be declared taxable. In that case, no one could be declared guilty of having performed an act of negligence. In other words, no person’s careless behavior has caused the injury.

There is one time when any money won as compensation for damages will be declared taxable. That exception applies to the times when a claimant gets money for punitive damages. A smart claimant will ask that the settlement agreement keep the money for compensatory damages separate from the money for punitive damages.

Anytime that a claimant receives interest on a judgement, that interest money can be claimed by IRS. If a case settles quickly, the claimant gets on interest money, and not a single cent of the compensation needs to be taken by IRS. Yet the situation can be very different, if the entire settlement process takes many months or years.

The government allows a claimant to earn interest on money won, if that money does not get delivered in a short space of time. Suppose, for instance, that someone with a personal injury claim has been awarded compensation by the court, compensation to cover his or her injuries. Assume, as well, that the defendant has chosen to appeal the court’s decision.

In that case, the victor, the injured victim might need to wait many months for the appeal to be heard, and for the court to reach a decision. If the decision supports the one made earlier, the victim’s compensation package has increased in size. The amount of acquired interest has been added.

Still, the person that won that larger compensation does not have the right to possess all of it. A portion of it belongs to the government. The government can take that part of the compensation that represents a given fraction of the interest payments. The government takes its money in the form of taxes.

That is an example of a time when a settlement agreement awards some money for a personal injury and some for a non-personal injury. The agreement should state which money covers the personal injury and which does not. It is best to let your Personal Injury Lawyer in Stouffville to handle it all.