For the most part, federal and state governments do not collect taxes on settlement money from personal injury claims because those proceeds are not considered earned income. Rather, the money is meant to return the injured party to the condition they were in before they suffered their injury. However, there are some exceptions, and certain types of damages are taxable.
Are Wrongful Death Settlements Taxable?
When someone suffers a fatal injury because of another party’s wrongful act or negligence in Washington DC, the personal representative of their estate may bring a wrongful death suit against that party. By doing so, they seek to recover compensation for death-related losses, such as:
- Medical bills from treating the victim’s injuries
- Lost wages and income the victim would have earned
- Funeral expenses
- Loss of care, companionship, and guidance
Wrongful death settlements are tax-exempt in most cases. As with personal injury claims, the damages awarded in a wrongful death claim are meant to offset the harm a plaintiff suffered because of the defendant’s actions. The defendant deprived the deceased’s survivors of their loved one, and the settlement seeks to make up for that as much as possible. As such, the IRS does not consider settlement money to be income.
Are Punitive Damages Taxable?
A jury may award an injury victim punitive damages in addition to compensatory damages in certain cases, including:
- When someone is injured because of another party’s evil motive, deliberate violence or oppression, or actual malice, and
- The at-fault party’s actions were particularly outrageous, reckless to the victim’s safety, or grossly fraudulent.
However, punitive damages are rare and require clear and convincing evidence.
These punitive damages are taxable as they’re considered “income” by the Internal Revenue Service (IRS). Punitive damages are intended to punish the offender and deter others from committing similar offenses. They are not meant to undo the harm a plaintiff suffered and return them to their pre-injury state. So, should you receive punitive damages at trial, you will need to include them as income when you file your tax returns.
Do I Have to Report Any of the Settlement Money to the IRS on My Tax Return?
Whether you have to report settlement money as income depends on the type of settlement agreement and what the money’s for. This IRS Tax Implications of Settlements and Judgments document provides guidelines for what should be included in your gross income, as well as the taxable and non-taxable aspects of personal injury compensation.
Settlements for personal injury claims – even those including lost wages – are not part of your gross income. Because they’re not taxable, you likely won’t need to report the income on your tax return.
However, if you receive a settlement for an incident that did not physically injure you, the IRS will consider that money to be income. And if you recover punitive damages – which may only be awarded at trial, not through an insurance settlement – you will need to count that money as income.
Are There Any Exceptions to the Non-Taxable Rules?
While personal injury settlements are nearly always non-taxable, there are exceptions to this rule. The primary exceptions are:
- Emotional distress damages arising from non-physical injuries
- Punitive damages
For example, imagine that a pedestrian has a close call with a reckless driver who comes inches from striking and perhaps killing them. While the pedestrian was not physically injured in the encounter, the experience was so frightening and emotionally overwhelming that they developed PTSD as a result. They file a claim with the driver’s insurance provider and receive a settlement. Because the harm the claimant suffered was not physical in nature, the IRS would likely consider that money to be taxable income. Or if an assault victim with a traumatic brain injury was awarded punitive damages, that compensation would be taxable.
Additionally, if you took a deduction for medical bills you paid out of pocket and then received a settlement for these expenses at a later date, you will likely need to pay the IRS back to offset the deduction.
Can the IRS Take Any of My Personal Injury Settlement If I Owe Back Taxes?
The IRS can take the settlement money from your personal injury claim or lawsuit to pay your back taxes. This typically happens when the IRS has placed a lien on your assets and property due to a failure to pay your taxes. However, whether the IRS will seize some or all of the settlement money depends on several factors, including:
- Your estimated back taxes
- What parts of your accident settlement are taxable
- Whether the money is paid into a bank account with an IRS levy
If you owe back taxes, you should discuss this with your DC personal injury lawyer to avoid unnecessary complications in the settlement process.
Contact a Washington DC Personal Injury Lawyer
Are you concerned about having to pay taxes on your personal injury settlement? At Marks & Harrison, our personal injury attorneys can explore the most efficient ways to structure your settlements so that it’s easy to identify what is taxable and what is not. We have been helping people in positions like yours since 1911, and we’ve recovered millions on their behalf in that time. Our clients say, “Everyone at Marks & Harrison was always cheerful and helpful.” Let us:
- Evaluate your case during a free, no-obligation consultation
- Investigate your injuries to determine who’s to blame
- Calculate the fair value of your claim
- Negotiate with insurance providers for an out-of-court settlement
- Take your case to trial if it’s the best way to pursue maximum compensation
- Advise you on the tax implications of your settlement or award
What’s more, we can do all this without charging you any upfront fees. We work on a contingency fee arrangement, charging you a fee only if and when we recover compensation on your behalf.
Don’t wait another moment to get the help you deserve. Contact Marks & Harrison for your free consultation, and let us pursue every cent of the compensation you deserve.
