Are Personal Injury Claims Taxable in Philadelphia?
If you have suffered serious injuries in an accident, whether in a slip and fall accident, auto accident, or some other kind of incident that resulted in personal injuries, you may be wondering whether you'll settle your case or take it all the way to trial. Broadly speaking, between 95% and 96% of personal injury claims settle before the trial. Once your award is determined, you may then wonder, Are personal injury claims taxable in Philadelphia?
Once you have accepted the liable party’s settlement offer, your case will officially be over. But now that you have received your settlement money, you may now be wondering whether Uncle Sam will tax your personal injury claim settlement. Alternatively, if you obtained your compensation through a court judgment, will your money be taxed as well? Questions like these stress out most injured victims.
Accident victims who have sustained severe physical injuries usually depend on the compensation they obtain from a settlement or court verdict to pay their medical bills, make up for their lost wages, and other accident-related expenditures. Having to pay taxes on their personal injury compensation is simply unfair. Fortunately, the IRS (Internal Revenue Service) recognizes unfair taxation of such compensation.
You Don’t Have to Pay Any Taxes on Physical Injury Compensation
Whether a judgment award or settlement is taxable will depend solely on the origin or basis of the claim. According to the U.S. tax code, compensation from personal injury claim verdicts or settlements is not taxable. The reason for this is that personal injury cases usually involve physical injuries, and the IRS clearly indicates that physical injuries should not be taxed. If you're asking are personal injury claims taxable in Philadelphia for physical injury compensation, the answer is no.
It doesn’t matter whether you accepted a settlement for your claim before or after you’ve filed a lawsuit. Likewise, it’s irrelevant whether you took your case to trial and obtained a favorable verdict. The IRS or the tax authority in your state will not tax your personal injury compensation. In addition, personal injury damages obtained because of a physical illness or physical injury are excluded from gross income according to federal tax laws.
Basically, personal injury damages in verdicts or settlements that compensate injured victims for these damages will not be taxed if they're awarded because of physical sickness or injury:
- Lost earnings
- Medical expenses
- Pain and suffering
- Emotional distress and pain
- Loss of companionship
- Lawyer’s fees
You May or May Not Be Taxed on Emotional Distress Damages
The IRS indicates that for tax purposes, “physical injuries” should be literally physical, such that they should be seen by the naked eye. This also means that if your claim involves emotional distress and pain, it should have resulted from your physical injuries. On the other hand, if the compensation you obtained for mental anguish or emotional distress did not stem from a physical illness or physical injury, the IRS requires that you include the proceeds in your income.
If you're asking are personal injury claims taxable in relation to emotional distress, it’s vital to point out that the amount you should include may be reduced by:
- The amounts used for medical bills that can be attributed to mental anguish or emotional distress that have not been previously deducted
- Medical bills that have been previously deducted for such anguish and distress that didn’t provide tax benefits
When Personal Injury Compensation is Taxable
As a taxpayer, you are well aware that there are certain exceptions when it comes to tax laws or any other laws for that matter. For instance, injured victims who have sustained a physical illness or injury will be taxed on any damages relating to breach of contract but only if the breach resulted in the injury or illness and it is the reason of basis for the claim. Likewise, injured victims may be taxed on the interest of the judgment. Depending on the state’s tax rules, interest may be added to the verdict or settlement for the duration of the delay.
Punitive damages, which the legal system uses to punish legally liable parties for flagrant and extreme reckless or negligent conduct, are taxable. To reduce your taxes if you are seeking punitive damages, your Philadelphia personal injury lawyer will ask the court to separate your award into punitive and compensatory damages. So even though the answer to the question of are personal injury claims taxable in relation to punitive damages is yes, they can be mitigated. Doing so will help make sure that the IRS will know that part of your compensation was purely for compensatory damages that should not be taxed.
Are Personal Injury Claims Taxable in Philadelphia? Ask a Knowledgeable Philadelphia Personal Injury Lawyer Now
Put simply, damages awarded for physical sickness or physical injury in personal injury cases are almost always not taxed for federal and state tax purposes. However, keep in mind that the IRS will tax any award or compensation that didn’t originate from verifiable physical sickness or injuries.
If you’re planning on filing a personal injury claim and would like to know more about how taxes might apply to your compensation, contact Mattiacci Law, LLC to talk to our experienced personal injury lawyer. Call 215-709-7915 or complete our online form to set a free evaluation of your claim with our Philadelphia personal injury lawyer today.