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Most of the money a person might receive in a personal injury settlement is not taxable because these funds are not considered income under state or federal tax law. Some types of financial recovery, however, can get taxed.
This blog will address the question, Are settlements taxable? Your Los Angeles personal injury attorney can answer questions you might have about your settlement proceeds.
Compensatory Damages Are Usually Not Taxable
Compensatory damages are funds that compensate the victim for getting injured because of someone else’s negligent or intentional act. Compensatory damages fall into two categories: economic losses and intangible losses.
Economic losses
This category includes financial damages from things like medical expenses, lost wages, future medical expenses, future lost wages, rehabilitation services, long-term care, equipment like an adapted vehicle, home renovations like wheelchair ramps, and other costs that arose out of the accident.
Intangible losses
Intangible losses tend to be things that do not come with paperwork, like invoices and receipts, that help to fix the dollar value of the item. Nonetheless, these losses have a financial value.
A common type of intangible loss is pain and suffering, which pays the plaintiff for the physical discomfort and emotional distress they endured because of the accident and their injuries. They might not know for weeks or months if they will ever regain the function they had before the accident. They might worry about whether they will lose their job while recuperating from their wounds and medical procedures.
Additional intangible losses can include things that arise out of the accident, like disfigurement from amputations or extensive scars, loss of enjoyment of life if the victim can no longer perform functions they used to enjoy before their injuries, chronic depression or anxiety, and post-traumatic stress disorder (PTSD).
The successful plaintiff in a personal injury case will have to pay their attorney fees, liens for things like medical expenses, and some other things, depending on their situation, out of their settlement proceeds, but usually, the compensatory damages portion of the settlement is not subject to taxation.
Punitive Damages Can Be Taxable Under California Tax Law
Personal injury lawsuits rarely receive awards of punitive damages because the plaintiff must prove that the defendant acted intentionally, with malice, or with reckless disregard for the consequences of their actions. Still, on the rare occasion that a personal injury settlement includes an award of punitive damages, California law will tax that portion of the settlement.
Interest Earned During an Appeal
Let’s say that your personal injury lawsuit went to trial, and you won. The defendant filed an appeal but had to deposit some or all of the award into an interest-bearing account. If you win the appeal or settle the case while the appeal is pending, and you receive the award plus the interest, the interest earned will be taxable. Similarly, an award that includes a payment of interest for some other reason will get taxed on the interest.
Awards That Exceed the Victim’s Costs
This rarely happens, but imagine that you have $100,000 in medical bills, and the jury awards you $150,000 for the category of medical bills. The $50,000 that exceeds the actual cost of your losses can be taxable. Please note that intangible losses like pain and suffering are not considered awards in excess of actual costs.
A Los Angeles personal injury attorney can help you pursue your case against the at-fault party responsible for your injuries and other losses. You can contact us today for a free consultation.