Will I Be Taxed on My Personal Injury Settlement?
According to the National Safety Council (NSC), the average cost of being injured in a vehicular accident ranges from $29,200 to $101,000 when all costs and losses are factored in, including wage and productivity losses, medical expenses, administrative expenses, motor-vehicle damage, and employers’ uninsured costs.
In Florida, your Personal Injury Protection (PIP) will not cover anywhere near that amount for medical expenses and lost wages, since it is capped at $10,000 and generally pays only 60 percent of your own medical costs and wage losses. Therefore, you may well need to pursue the at-fault driver through a personal injury lawsuit.
When you sue, you can also ask for non-economic damages for your pain and suffering and loss of consortium (companionship). Say you win $50,000 and you get a lump-sum payment. Is that income taxable by the Internal Revenue Service (IRS)?
The short answer is “no” in most cases, but you should check with your attorney. The same non-taxable status would apply if you received a large settlement from the other driver’s insurance or your own insurance company.
If you or a loved one has been injured in an accident in or around Altamonte Springs or elsewhere in Central Florida, contact me at the Law Office Of Mark A. Cornelius P.A. to pursue your legal options, even if you’re just filing your initial claim with your insurer.
I will handle the negotiations with your insurer and if need be, launch a personal injury lawsuit. I can also advise you on any tax implications. I proudly serve clients in communities throughout Central Florida, including Seminole, Orange, Osceola, Volusia, and throughout the counties of Polk and Lake.
The IRS and Your Settlement
Since Florida has no personal income tax, only federal taxation could apply to any award or settlement you receive. In most cases, a settlement or award would be taxable, but the IRS exempts from gross income any sum received “on account of personal physical injuries or sickness” (Internal Revenue Code Section 1.104.1(c)).
IRS Revised Rule 85-97 goes on to say: “The entire amount received by an individual in settlement of a suit for personal injuries sustained in an accident, including the portion of the amount allocable to the claim for lost wages, is excludable from the individual's gross income…”
In the eyes of the IRS, the loss to the personal injury victim is equal to the compensation received, so there is no taxable gain, with some exceptions.
Exceptions to the Non-Taxation Rule
The settlement or award amount can include compensation for medical bills, lost wages, emotional distress, pain and suffering, loss of consortium, and attorney’s fees. One exception to the exclusion rule is any compensation you receive for punitive damages, which would be rare anyway.
Punitive damages are generally only awarded if the at-fault driver’s actions were willful, wanton, or reckless. Any interest added to the settlement would also be taxable. The court may order the defendant to pay the award plus interest dating from the filing of the lawsuit. The accrued interest could be taxable.
Remember also that any settlement or award received for property damage may also have to be included in your gross income on your tax filing. Also, if you deducted medical expenses on prior-year tax returns, you might have to account for that sum when filing after your award or settlement. Check with your attorney on this.
Let Your Attorney Review Your Situation
The rule excluding settlements or awards for personal physical injuries seems straightforward enough, but you should consult with an experienced attorney on all matters relating to any injuries you or your loved one has suffered in a vehicular accident.
Your attorney will be able to handle questions from your insurer and negotiate for a better settlement than you would no doubt be offered. If there is cause for a personal injury lawsuit, your attorney can weigh that for you and initiate civil action if necessary. Finally, your attorney can advise you of any tax implications.
If you or a loved one has been injured in a vehicular accident in or around Altamonte Springs, contact me immediately at the Law Office Of Mark A. Cornelius P.A. I have 25-plus years of experience and can help you receive the just compensation you deserve. Your consultation is free.