The settlement money you receive from a successful personal injury claim is intended to make you whole after the injuries and other damages you incurred by alleviating the financial hardships you experienced due to another person’s wrongdoing or negligence. One question that many personal injury victims have is “Is my personal injury settlement taxable?” Generally speaking, the IRS does not tax compensation awards for physical illness or injuries. In other words, settlements that only cover medical bills, pain and suffering, or other physical damages, are unlikely to be taxed. If you have questions regarding a potential personal injury claim, contact the experienced Hampton personal injury lawyer at Shapiro, Washburn & Sharp to schedule a free consultation with a member of our legal team.
What Damages Are Tax-Exempt in Virginia Personal Injury Settlements?
In Virginia, damages for physical injuries that are tax-exempt include:
- Compensatory damages: Financial compensation resulting from physical injuries, such as medical bills, lost wages, pain and suffering, and legal fees, are usually tax-exempt.
- Emotional trauma: Any damages awarded for mental anguish and emotional trauma arising from physical injuries are also tax-exempt. If, however, these damages were deducted as medical costs in a previous year, they could be taxed.
- Wrongful death settlements: In regards to being taxed, wrongful death settlements are handled in much the same manner as personal injury settlements. According to IRS Section 104(c), the damages awarded in a wrongful death suit, including any punitive damages, are tax-exempt.
What Portions of Settlements Are Not Tax-Exempt?
Damages that are not tax-exempt in a Virginia personal injury lawsuit include:
- Punitive damages: Although quite rare in personal injury cases, punitive damages are deemed taxable income.
- Emotional trauma in the absence of physical harm: Damages awarded for mental anguish or emotional trauma without any physical injury are subject to taxation. The taxable portion is calculated by deducting previously paid medical bills associated with emotional trauma that have not been previously deducted.
- Interest on a settlement: Any interest that accrues on a settlement award is taxable. Large settlement awards tend to yield a considerable amount of income from the interest alone, so it is in your best interest to seek the advice of a skilled Hampton personal injury lawyer in order to mitigate any possible tax consequences.
- Medical bills that were previously deducted: If you claimed medical expenses relating to your accident as deductions in a previous year, you need to include the money you received as part of your income.
How Can a Personal Injury Lawyer Help With My Taxes?
A knowledgeable personal injury lawyer can offer valuable advice when it comes to the taxation of your settlement by:
- Evaluating your settlement for tax implications: Your lawyer can analyze your settlement details and consult with tax experts to establish the taxability of its various components. They can also explain any potential consequences and ensure that you are able to make educated decisions.
- Structuring your settlement: In some cases, your Hampton personal injury lawyer will be able to arrange a structured settlement that accounts for any tax implications and optimizes your finances. They can partner with professionals and develop a plan that is compatible with your financial goals.
- Providing dependable advice: Throughout the legal process, your lawyer will represent your interests, answer your questions, and make reliable recommendations by ensuring that your settlement accounts for any tax considerations and protecting your rights during the personal injury process.
Talk to a Hampton Personal Injury Lawyer
The Hampton personal injury lawyers at Shapiro, Washburn & Sharp understand how complicated the justice system and the financial processes that arise from it can be. We use our knowledge and extensive experience to make sure that our clients obtain the financial compensation they deserve, like the $1 million settlement we won for a client who was left permanently disabled after her motorcycle was forced off the roadway by a negligent driver. If you are considering filing a personal injury suit and have questions or concerns regarding the taxation of your settlement award, schedule a free consultation by calling (833) 997-1774 or filling out the contact form on our website. Our offices are located in Hampton, Norfolk, Virginia Beach, and Portsmouth.