Is The Personal Injury Settlement Taxable? - Consult The Personal Injury Lawyer Orange County

If you settle the personal injury case, do you have to pay state or federal income tax? In most cases, the answer is no. It means you don’t have to pay taxes on any personal injury settlement you have received. Now, at least to the extent that the amount you get is meant for compensating you for injuries suffered.

The general rule when it comes to personal injury payout and income tax, but you must know there are some exceptions. Of course, you can hire a personal injury lawyer Orange County for assistance.

Settlement For Injury Or Illness Would Be Tax-Free

The federal income tax code specially excludes from one’s gross income the amount of any damages received, by insurance settlement or lawsuit, as long as the proceeds are compensation for physical illness, physical injuries.

All state tax codes follow the federal tax codes. This means you don’t have to pay state or federal taxes for a personal injury settlement.

In other words, if you win an award in a personal injury lawsuit, you are going to pay taxes on the funds meant to cover the punitive damages, while the funds meant to cover the injuries would be tax-free.

Punitive Damages Award Is Taxable

One exception to the non-taxability of injury lawsuit proceeds is when your compensation comes in the form of punitive damages. This is paid by the defendant as punishment for particularly outrageous conduct, which is meant to deter others from such similar conducts.

When you win an award in the personal injury lawsuit, with the help of your personal injury lawyer Orange County, you would have to pay taxes on the funds that are meant to cover the punitive damages.

However, the funds that are meant to cover the injuries would remain tax-free.

The good news is that if you have to pay taxes on the punitive damages award, you are allowed to deduct your lawyer’s fees that relate to this punitive damage award.

In simple words, if you are awarded $100,000 for the punitive damages and you have agreed upon 1/3 contingency fee with the lawyer, you can deduct $33,333.33 in the lawyer fees related to the punitive damage award.

It is important to note the punitive damages are rarely a component of any personal injury claim.

What Does IRS Consider As Taxable?

The IRS clearly states out which portions of personal injury settlements get excluded from income taxation. You can consult your personal injury lawyer Orange County for further assistance.

As you know you cannot be taxed on money from the settlement or jury award meant to compensate you for:

• Emotional distress caused due to physical injuries
• Physical injuries
• Lost wages from physical injuries

This means the money you have received from the financial damages such as medical bills and lost income for non-financial damages such as suffering and pain are tax-free.