How Accident Settlements Can Impact Your Tax Responsibilities
There are financial burdens that can follow Florida car wrecks, and these monetary concerns are on top of possible physical harm and emotional stress. When it comes to protecting your finances after a car accident, it is crucial to learn about how a settlement could impact your tax responsibilities.
When concerns about financial issues and tax implications arise, connect with a professional who can guide you through the process. A Delray Beach personal injury attorney will fight for a full compensation package and can share with you what is taxable and what is not, so you can make informed decisions regarding your finances.
Compensation for Physical Injuries and Mental Anguish
The IRS generally considers compensation for physical injuries or physical illness to be non-taxable income. So if you receive a settlement for medical expenses directly related to your physical injuries, you typically will not be required to report this as income on your tax return.
Similarly, financial compensation for emotional distress caused by a personal injury is typically non-taxable. It is important to note that the mental anguish needs to be a result of the physical injury. This means if you receive a settlement for emotional distress but there is not a clear association of the anguish being related to a physical injury, it may be subject to taxation.
Punitive Damages, Settlement Interests, and Legal Fees
While they are rare, punitive damages are occasionally awarded to punish the defendant for egregious misconduct. In these situations, the damages are typically considered taxable income. Interest earned on a settlement amount is generally taxable as well, this is true whether it is pre-settlement or post-settlement interest.
There is also the possibility of attorney’s fees being paid as a percentage of the settlement amount, and how this financial disbursement will be treated when it comes to taxation depends on the circumstances. For instance, if the settlement is for physical injuries or physical sickness, you may be able to report attorney’s fees as deductible expense, but if the compensation you receive includes taxable income, attorney’s fees may not be deductible.
It is also essential to understand that not all payouts happen in one lump sum. Some accident settlements are structured, particularly if the amount that an injured party is compensated is high. Then, payments will be provided on an agreed upon schedule over time. These structured settlements can have different tax implications, so asking questions and connecting with professionals, such as a Delray Beach personal injury attorney, is important in order to have a full understanding of how each payment is treated for tax purposes.
Has a suggested compensation amount led to you worrying about tax implications? Accident settlements can provide much-needed financial relief, and having a legal professional fight for a full compensation amount and sharing with you any tax responsibilities will allow you to move past an injurious event with confidence. To learn more, connect with over 30 years of experience. Talk to the attorneys at Earnhart Law. Call 561-265-2220 or contact us online.