Personal Injury Settlements and Taxes
As a personal injury attorney, I get asked all the time whether the government takes any of the money my clients receive in a settlement or verdict. The basic answer is no, but there are gray areas. This simple question could affect how much money is left in your pocket. As personal injury lawyers, we are not tax experts. Anyone receiving money for their injuries should consult their tax preparer.
Generally speaking, the government does not tax any of the money awarded to someone hurt in an accident. The idea behind this is that the money is being used to make the injured person whole. This money is used to pay medical expenses while the injured party is on the road to recovery. Since the money is being used to put the injured person back in the position they would have been in had the injury not occurred, it is not considered income and not taxed.
There are exceptions, however, and your tax expert will be able to discuss all exceptions to the general rule with you. One such exception is for “punitive damages”. Although extremely rare, this type of award allows an injured party to recover a little more for their injuries when the person or company that injured them was more than just negligent—they must have been some degree of reckless. When punitive damages are awarded, the court is looking to punish the party for their actions. In Virginia, we sometimes see punitive damages awarded in drunk driving cases.
Punitive damages are subject to income tax. Unlike the portion of your settlement or verdict that is meant to make the injured party whole, this money is “extra” money that gives the injured party more than what they had before the accident. As such, the portion of your verdict or settlement designated as punitive damages is considered income and you must pay taxes on that amount.
As mentioned above, this blog is meant to be purely informative, and any tax question should ultimately be directed to your accountant or tax attorney. The tax consequences for any verdict or settlement should be discussed in an individualized capacity with your qualified financial advisors. Call Cooper Hurley Injury Lawyers at 757.455.0077 if you have been injured in an auto accident due to the fault of another driver.