Getting injured is a life-changing experience that can affect many things you may not even have realized. One of these lesser-known ways has to do with your tax status. Injuries are expensive, and whether you’ve sustained a lot of financial losses due to paying for your medical treatment or you’ve received a settlement or had a verdict awarded in your favor, the way the government taxes you could change substantially. On this blog, we’ll attempt to make the impact on this particular part of your life a little bit easier to understand; we’ll discuss what the laws and tax codes say about income and expenses pertaining to injuries and personal injury lawsuits.
When you sustain a serious injury, odds are you’ll accrue some pretty significant expenses for your treatment, rehabilitation, and recovery. Because this can place such a massive strain on your livelihood, the IRS actually allows you to deduct the costs of your medical treatment on your tax return. For the years 2017 and 2018, you could deduct the costs of your treatment if your total expenses exceed seven and a half percent of your total gross income. However, beginning for the 2019 tax year, you may only deduct the un-reimbursed amount of your qualifying medical expenses if it exceeds ten percent of your total gross income.
Here’s a little bit simpler of an explanation. For this tax year (2018) you are allowed to deduct the entire value of your medical expenses from your tax return provided that the total cost of your expenses exceeds seven and a half percent (7.5%) of your adjusted gross income (your total income minus any deductions, student loan interest, or contributions to retirement accounts that are taken before taxes). For example, say your AGI is $100,000 this year before taxes, however you suffer some serious injuries in a car accident and your medical treatments cost you $10,000 in medical bills. In this case, you could claim the entire $10,000 on your tax return because the $10,000 is ten percent of your total gross income, exceeding the 7.5 percent required to be able to do this.
However, starting in 2019, you can only deduct medical expenses that have:
- Not been reimbursed
- Your medical treatment qualifies for reimbursement
- Exceed ten percent of your adjusted gross income
What expenses qualify for reimbursement? Most of them. The only things that don’t usually qualify are cosmetic procedures like plastic surgery, as well as non-prescription drugs or general health purchases like toothpaste, vitamins, or health club dues.
Verdicts & Settlements
However, if you receive a settlement or verdict from a personal injury claim, your tax status could change once again. Verdicts and settlements can provide you with massive relief and funding you need to continue to get the treatment and care you need to recover, but some people are concerned that the income will radically alter their tax bracket and possibly cost them too much.
There is one important defining characteristic when it comes to your verdict from your case: what type of damages you receive. There are two types of damage: compensatory and punitive. Compensatory damages are generally not considered taxable income since they are intended to compensate you for losses and expenses you sustain as a result of your injury.
Let’s go back to the previous example—if you are awarded a $10,000 settlement in your favor to pay for your medical expenses, then the $10,000 you receive would not be taxed. However, you could be required to pay back any income tax you initially avoided as a result of claiming the $10,000 in expenses. This isn’t all that uncommon for injury cases which start in late in one year and then conclude early in the next when court operations resume.
Punitive damages on the other hand are not designed to reimburse you for the expenses you have occurred, but rather to penalize the party who is found to be at fault for your injury, usually only in instances of gross negligence. These damages are considered taxable income, and could change your tax bracket. It’s strongly advised you speak with a tax accountant about any punitive damages you receive and get their advice on how to properly manage it in order to minimize your tax liability and prepare for filing your upcoming return.If you would like to learn more about tax consequences of a personal injury lawsuit, talk to the Stuart personal injury attorneys at Lauri J. Goldstein & Associates, PLLC by calling (866) 675-4427!