Do Personal Injury Settlements Get Taxed in Philadelphia?

  • January 17, 2022
  • Blog

If you receive compensation from a personal injury settlements or lawsuit, you probably have questions about the tax liability of the money you received. Whether you must state the settlement proceeds as taxable income will depend on the specific circumstances and facts of your case. 

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Generally speaking, yes, your personal injury settlement may be taxed in Philadelphia, but not all of it. Remember that a settlement might include multiple elements that each party has allocated. For instance, a settlement agreement might include lost income or back pay, medical expenses, legal fees, and emotional distress, among others.  

There are also exemptions to most tax-linked and legal rules. This is why consulting with an experienced Philadelphia personal injury lawyer before accepting the other party's settlement offer is very crucial. Your lawyer can provide you with a more in-depth assessment of the potential tax consequences of your settlement and negotiate a settlement amount that will cover all your damages. 

Medical Bills Are Not Usually Taxed

Medical bills are usually tax-free because this part of the personal injury settlements will be paid directly to the healthcare professionals and institutions that treated you. On the other hand, you must include the medical bills as income if you elected to take an itemized deduction for medical bills in any past year and you received a tax benefit.   

Property Damage is Not Taxed

This is not taxed because you’re essentially not getting paid for something. Instead, you are just getting your money back for a piece of property that you already owned and got damaged or lost in an accident. This is why the IRS doesn’t consider this as income that can be taxed. 

Lost Income May or May Not Be Taxed 

If you can’t go to work due to the injuries you sustained in an accident, this is the compensation you obtained due to physical injuries stemming from the accident. This means that this will not be taxed. However, take note that the lost income part of your settlement may be treated differently, based on IRS rules, if a part of the lost income you recovered is not attributable to your physical injuries. If this is the case, then that part will be taxed. 

Pain and Suffering is Not Taxed 

Your personal injury settlements will also include non-economic damages. This compensates you for what you’ve been through, continue to go through, and/or would go through due to your injuries. Essentially, damages for pain and suffering compensate injured victims for the actual physical and emotional pain caused by their injuries. These will not be taxed.

Punitive Damages Are Taxed 

These are taxable and must be reported to the IRS as income even if you obtained them as part of a personal injury settlement for physical injuries or sickness. If part of a wrongful death settlement, however, punitive damages will not be taxed. 

Emotional Distress May or May Not Be Taxed

Your personal injury settlement may also include emotional distress, which is considered non-economic damages similar to pain and suffering. This compensates you for the psychological or emotional injuries you suffered due to your injuries. The IRS may tax your emotional distress compensation depending on the circumstances that caused it. 

The IRS will not tax your emotional distress compensation if it stems from your physical injuries. On the other hand, if your injury is the emotional distress itself, the IRS will tax it minus the amount you've already spent for your injury-related medical expenses. 

Tax Liability for Settlements from Multiple Claims

In some cases, an injured victim may have two different claims against the liable party, one of which isn’t about personal injury and one of which is based on personal injury. In such cases, particularly if the personal injury case involves a larger settlement than the non-personal injury case, you must make sure to explicitly state in your settlement agreement the specific amount of the personal injury case settlement and the amount of the non-personal injury case settlement. 

Speak to Our Skilled Philadelphia Personal Injury Lawyers Today

In a perfect world, injured victims will get their settlement as quickly as possible and without paying any taxes on it. However, Uncle Sam is, unfortunately, often entitled to some of your settlement. Also, keep in mind that the IRS isn't bound by your settlement agreement's terms and conditions, so speak to a Philadelphia personal injury lawyer first before agreeing to any settlement offer.  

If you have questions or concerns about how your personal injury settlement will be taxed or about pursuing compensation for injuries caused by someone else, reach out to the Philadelphia personal injury lawyers of Mattiacci Law, LLC. Fill out our online form or call 215-709-7915 to arrange your free case review today. 

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