How Do Taxes Work on a Settlement for Personal Injury?
If you’ve been hurt in an accident and received a settlement, you might be wondering about taxes. Understanding how taxes work on a personal injury settlement can help you keep more of your money. Let’s break it down!
What Is a Settlement?
A settlement is money you get when you resolve a personal injury case without going to trial. This money helps pay for your medical bills, lost wages, and other costs related to your injury.
Do I Have to Pay Taxes on My Settlement?
Most of the time, you do not have to pay taxes on personal injury settlements. Here are some key points to know:
- Physical Injuries: If your settlement is for physical injuries or sickness, it’s usually tax-free. This means if you were hurt in a car accident and received money for your medical expenses, you likely won’t owe any taxes.
- Emotional Distress: If your settlement includes money for emotional distress, the rules are a bit different. If the emotional distress comes from a physical injury, it is usually tax-free. However, if you received money for emotional distress alone, it may be taxable.
- Punitive Damages: If you received punitive damages, which are meant to punish the wrongdoer, these may be taxable. So, you might need to pay taxes on that part of the settlement.
How to Prepare for Taxes on Your Settlement
Even though many personal injury settlements are tax-free, it’s always a good idea to be prepared. Here are some tips:
- Keep Good Records: Save all documents related to your settlement. This includes any agreements, medical bills, and other important papers. Good records can help if you need to explain your settlement to the IRS.
- Consult a Tax Professional: Taxes can be complicated. It might be helpful to talk to a tax professional who understands personal injury settlements. They can give you advice based on your specific situation.
Conclusion
In most cases, personal injury settlements for physical injuries are not taxed. However, it’s important to know the details of your settlement and keep good records. If you have questions, don’t hesitate to reach out to a tax professional.
At Jordan Law, we’re here to help you every step of the way. If you have more questions about your personal injury case or how settlements work, feel free to contact us!
