Are Personal Injury Settlements Taxable in PA and NJ?
How Are Personal Injury Settlements Taxable in PA and NJ?
Tax season is here, and you might be wondering, Are personal injury settlements taxable in PA and NJ? The answer is both yes and no.
Money that is received in a court settlement is usually considered income and is therefore taxable. However, personal injury settlements are an exception, so the money you get after a slip and fall or car accident is likely not taxable income.
Funds that you receive in a personal injury settlement can be placed into different tax categories. The money is allocated for various expenses that resulted from your accident, including funeral expenses, lost wages, car repairs, or medical expenses. Each category has its own relationship to taxation, so when you ask are personal injury settlements taxable - it depends. Let’s take a look.
The Government’s Stance on Personal Injury Settlements
The federal government looks at personal injury settlements as a mechanism for compensating accident victims for the losses they suffer (due to the negligence of others). These losses are termed compensatory damages, which means they are intended to compensate accident victims. In other words, your personal injury settlement is intended to pay you back for the losses you’ve already suffered, and this is why your personal injury settlement (with a few exceptions) is not considered income and will not be taxed. Ultimately, you saw no net gain because someone caused you to suffer losses and you were compensated accordingly. Any amount that exceeds your actual losses, however, can be taxed, and the most common example of this is punitive damages, which are designed to punish the at-fault party and not to compensate the injured party.
Your Personal Injury Claim in PA and NJ
The goal of your personal injury claim is to make you whole again. This means compensating you for the losses you’ve suffered, and because you don’t experience a financial gain in the process, your settlement (or court award) will not be taxed.
Common Personal Injury Claims in PA and NJ
There are a wide range of personal injury claims out there, but some of the most common include the following categories:
- Car accidents, truck accidents, and other kinds of traffic accidents
- Slip and fall accidents, drowning accidents, dog bites, and other kinds of premises liability claims
- Injuries caused by defective consumer products, which are called product liability claims
Other claims that proceed in much the same manner as personal injury claims include wrongful death claims in which the injured party succumbs to his or her injuries and is unable to bring a personal injury claim, workers’ compensation claims in which a construction worker is injured on the job, and claims related to medical malpractice.
Money for a Medical Condition in PA and NJ
If you received a settlement related to a medical condition, injury, or illness and you have not taken an itemized deduction for medical expenses in previous years, then your settlement is non-taxable. However, if you have paid out expenses for injury or illness over the course of more than one year, and in past years you did take a deduction for medical expenses, you do have to include that portion of your settlement in your taxable income.
Compensation for Emotional Distress in PA and NJ
If you have received money for emotional distress, it is treated the same as it would be for physical injury. It is non-taxable as long as you have not taken an itemized deduction for medical expenses in the past. However, if the emotional distress is unrelated to physical injury or illness, then the award is taxable.
PA and NJ Loss of or Damage to Property Compensation
Loss in value of your property is another confusing area. In this case, it is important to know the base value of your property before the accident. If the compensation you receive is less than that value, it is not taxable. If it exceeds the value, then it is taxable. If your claim involves property damage – such as to your vehicle in a car accident – your personal injury claim can address the matter, and any compensation you receive will go untaxed.
Are Personal Injury Settlements Taxable If They Were for Lost Wages?
If you have received compensation for lost wages, wrongful termination, or for back pay, this money is taxable and is also subject to social security and employment tax withholding. If the money you received was awarded as compensation for loss of business, that money is considered taxable income.
Your Medical Expenses in PA and NJ
If you’ve been injured by another driver’s negligence, the medical costs you face can be immense, including:
- Emergency care and transportation
- Surgery and aftercare
- Hospital stays
- Medical treatment, procedures, tests, and general care
- Appointments with doctors, specialists, and other medical professionals
- Physical therapy
- Occupational therapy
- Prescription medications
- Pain management
- Adaptive physical devices
- Home health care
It’s a lot of expense and a lot to take in, but any amount that covers your actual medical expenses that you receive compensation for in your personal injury claim is not taxable. However, if you paid for some or all of these expenses in a prior tax year and took a tax deduction for them, the corresponding portion of your personal injury settlement (or court award if your case goes to trial) will be taxed. It’s complicated, and working closely with an experienced PA and NJ personal injury lawyer is always well advised.
Your Pain and Suffering
Compensation for your pain and suffering addresses the emotional toll you’ve endured, and because this is part of the legal damages you’ve experienced, this portion of your settlement or court award is not taxable income. Your pain and suffering can manifest in any of the following ways:
- A change in personality
- Severe mood swings
- Increased anxiety, including panic attacks
- Bouts of depression
- Accident flashbacks
- Sleep disturbances, including night terrors
- Difficulty focusing
While these emotional concerns can be more difficult to identify and quantify, they represent a very challenging hurdle that should not be ignored. Like your medical expenses, this element of your compensation is not taxable.
Your Lost Earnings
If your personal injury claim includes compensation for lost wages that you were denied during your recovery and/or that relate to a decrease in future earnings, this amount will be subject to income, social security, and withholding taxes. The distinction here is that this portion of your award is intended to compensate you for income you would have been taxed on, and as such, your compensation will be similarly taxed.
What About Punitive Damages in PA and NJ?
Punitive damages are awarded in some personal injury cases when a jury wants to punish the person or company that is liable for the injury beyond paying for expenses.
In wrongful death cases, when someone's negligence has caused a death, it is fairly common to add punitive damages to a settlement. Because this is a cash award, punitive damages are taxable, even if they were awarded in the context of a personal injury settlement. Likewise, interest that has accrued during the year on settlement award money is considered taxable income.
Punitive Damages Are Uncommon in PA
Punitive damages are uncommon, but they can play a role when the at-fault party’s actions are so egregious, reckless, or intentional that the law sees fit to punish him or her and to deter others from engaging in similarly dangerous behaviors. The kinds of cases that are more likely to involve punitive damages include car accidents caused by drunk drivers and cases involving manufacturers who cover up known defects that prove dangerous to consumers. If your case does involve punitive damages, this portion of your settlement or court award will very likely be taxed – and you need a personal injury attorney on your side.
PA and NJ Non-Injury Claims Are Taxable
Personal injury awards are not taxable when they relate to obvious illness or injury. Money that does not relate to physical injuries, such as unlawful discrimination or breach of contract, is considered taxable income. Attorney's fees also may be taxable, so it is a good idea to clarify this with an accountant.
How Do I Know If I Have a Personal Injury Case in PA or NJ?
Compensation in personal injury cases varies widely. The very vast majority of cases are settled out of court, and the injured party is awarded money to pay for those expenses directly associated with the injury or illness. A very small number of cases go to trial. These usually include wrongful death and involve large settlements. The outcome of a personal injury case is determined by the negligence of the person responsible, the severity of the injury, and how directly the negligence caused the injury.
Get Started With Your Personal Injury Case
If you have been injured in an accident, you may have a lot on your mind. You might be wondering how you are going to support your family if you can no longer work. You might be concerned about trauma, stress, depression, and how all of this affects your loved ones. The most important thing you can do for the people in your life is to get the help you need right now.
A personal injury attorney can help you sort out the details of your accident and get you the compensation you deserve. If you're asking, Are personal injury settlements taxable, there will be plenty of time in the months ahead to worry about your tax liability. Right now, reach out for help.
Let a Philadelphia Personal Injury Lawyer Worry About It
You may be eligible for monetary compensation for your injuries. This money can help you pay for medical expenses, lost wages, attorney's fees, and much more. But when you receive that money you may wonder, Are personal injury settlements taxable?
The experienced team at Mattiacci Law, LLC, care about getting you the maximum compensation allowed by law. We are available to answer your call any time of the day or night, so call now and let us get started on your personal injury case.