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Are Personal Injury Awards Taxable Income?

Most of our clients are excited or overjoyed when they get the settlement or verdict they need for financial relief after their injury. However some approach us with concern that they don’t believe they can afford to pay the taxes on their award, and that they may still financially struggle. For these individuals, we have some great news: the majority of physical injury awards are not taxable income. On this blog, we discuss what the IRS says about personal injury awards in greater detail.

What is Not Taxable?

The easiest way to answer this question is to look at the two types of damages you can receive as a result of your injury: compensatory damages, and putative damages. Compensatory damages are meant to cover your out-of-pocket expenses sustained as a result of the accident. This includes things like medical care, property damages, and rehabilitation treatments.

Compensatory damages can also include mental issues, such as emotional distress, pain and suffering, or loss of enjoyment. So long as these things stem from a physical injury, these awards are not subject to taxation. The good news for most injury victims is that this covers all or the vast majority of their award or settlement.

However, this only holds true if the injuries are physical. If a case arises from emotional-only damages, all awards received would be considered taxable. Things such as emotional distress, which do not have a physical injury associated with them, are legally taxable by the IRS. Therefore it’s important to prove even a slight amount of physical injury to allow the majority of your awards to be considered non-taxable.

What is Taxable?

There are just a few types of income that are considered taxable. The first is a financial award intended to replace lost income. This is also a relatively common type of award, which means you may have received it. The logic behind this law is that you would not have missed the work if you had not been injured, and the money you made from your work would have been taxed anyway, so taxing this replacement income similarly to your regular working income is not really any additional burden.

Secondly, putative damages are considered taxable. These damages are exceedingly rare, and are only awarded by judges in cases of extreme gross negligence as a punishment to prevent them from doing so again. Because these damages are not meant to replace anything you may have paid out of pocket for your treatment or lost as a result of the accident, they are taxed because it is considered additional income you would not have had otherwise.

If you have been injured in an accident, you should not hesitate to have your case reviewed by a Stuart personal injury lawyer. Attorney Lauri J. Goldstein has extensive experience helping injury victims obtain the financial relief they need to restore their life as much as possible. We are not afraid to take your case as far as we need to in order to get you compensation, and we have extensive experience successfully standing up to the daunting teams of legal professionals an insurance company may bring to fight back against you.

Put a skilled advocate in your corner, call Lauri J. Goldstein & Associates today at 866-675-4427 for a free case evaluation.