Taxes can be a pain, and even more so when they take a large chunk out of your personal injury settlement.
It’s very important for those who receive compensation in a personal injury case to understand the exact amount they will receive, and that includes knowing how the taxes surrounding one’s compensation will work.
The fact is an individual’s compensation can be taxable, nontaxable or partially taxable. The degree to which a personal injury award is taxable depends on the type of case in question and the details of the awarded compensation.
The whole point of a personal injury award is to bring your life back to normal, and taking a large portion out for taxes doesn’t help you accomplish that. Because of this, the majority of personal injury awards are nontaxable.
To put it simply, any compensation that stems from a physical injury is typically nontaxable. For example, any compensation you may receive for medical care will be tax-free. Additionally, any pain and suffering, lost wages or deficiencies that stem from a physical injury can also be considered nontaxable, even if they aren’t necessarily physical injuries.
There are a few types of compensation, however, that will likely be taxed. The first of those is emotional trauma or mental distress. This category is subjective at best. As stated above, emotional trauma and mental distress can be tax free if directly related to a physical injury. However, if the trauma does not stem from a physical injury, your compensation will likely be taxable.
Another taxable reward is punitive damages. These damages are awarded as a means of punishing the responsible party and, while they’re rarely awarded, can be taxable even if the cause was a physical injury.
If you’re confused about whether or not your personal injury award will be tax-free, don’t hesitate to contact the Tampa personal injury attorneys at Lorenzo & Lorenzo. We’ll give you a free consultation of your case and answer any legal questions you may have.