Are Lawsuit Settlements Taxable?
If you’ve received or will receive money from a lawsuit, you’re probably wondering if that money is taxable or not. The answer to that question is that it depends. Parties may file lawsuits and win settlements under a variety of circumstances. The situation that results in you being awarded a settlement will dictate whether you’ll have to pay taxes on it.
According to the Internal Revenue Service (IRS), lawsuit settlements are generally considered as income with one exception, which is when personal injury lawsuit settlements are involved. Below we’ll highlight some examples of personal injury legal matters that may warrant you filing a personal injury lawsuit before addressing rare circumstances in which you might have to pay taxes on the settlement you receive. Just know that the best way to know if your lawsuit settlement is taxable is by speaking with a certified public accountant (CPA), especially if the settlement sum is substantial.
Types of Common Personal Injury Lawsuits
Any incident in which a person’s negligent actions result in another individual suffering injuries or losing their life may constitute a personal injury incident. Pennsylvania law allows individuals who have suffered injuries at the hands of another individual to hold them liable for their actions. A deceased individual’s estate can do the same if one person’s negligent actions resulted in another person losing their life.
The following are common examples of personal injury cases that end up with the filing of an out-of-court settlement or lawsuit, which may require you to have a clear understanding of your tax obligations:
There are a variety of ways in which auto accidents may occur. Someone may not notice that you’re backing up, and their car might collide with yours in the process. Or, you might be stopped at a red light, and someone fails to brake in time to avoid colliding with you. Additionally, someone may not be familiar with the area and turn onto an outbound interstate ramp, crashing into you head-on as you exit it. Each of these car accidents can result in you suffering significant injuries, requiring you to undergo surgery and pursue other costly treatments.
As a no-fault state, motorists here in Pennsylvania must carry mandated minimum insurance coverage to cover their medical bills if they suffer injuries in a crash. However, if their accident-related bills exceed their policy limits, they can take legal action against a motorist who struck them to recover additional compensation. In this case, medical bills and proof of lost wages are key to demanding and receiving compensation.
You go to a friend’s Philadelphia home with your family, and he shows you the new deck he built on his second floor. Your child leans on the railing, but the railing isn’t bolted down yet, so they fall and die. You may have a valid wrongful death claim to file against your friend for negligence and be eligible to seek compensation as a result.
Wrongful death specifically refers to a situation in which someone else’s negligence leads to another person’s death. If someone in your family dies under preventable circumstances had an individual only implemented best safety practices, then you may be entitled to compensation.
While many personal injury cases result from accidents, some stem from intentional violence. Someone who attacks or looks like they will attack you for whatever reason can cause bodily injury.
For example, you’re wearing a shirt from your favorite sports team while walking down the street. Someone passing by yells some profanity at you for being a fan of your team and you respond in kind. They get mad and punch you, breaking your nose. You could be entitled to compensation for the injuries you suffered in such a scenario.
Slip and Fall Accidents
Possibly the most common type of personal injury accident that can result in injuries is a slip, trip, or fall. This type of injury event can happen so suddenly.
For example, you’re at the airport and go into the bathroom. There is no signage anywhere that the bathroom has been cleaned and that the floors are still wet. As you step into the bathroom, you slip on the wet floor, fall down, and break your elbow. Since there was no warning that the floors were slippery, you may be able to receive compensation. In this situation or something similar, your ability to file a lawsuit and recover compensation will depend on the environment where your injury incident happened and the potential neglect of safety standards.
If you’re injured using a product that is defective, you may be able to receive compensation. For example, you turn on your new electric kettle. As you pour the boiling water into your cup to make tea, a leak causes the boiling water to splash onto your hand, and you suffer 2nd-degree burns. The product’s defect caused your injury, and you could be entitled to compensation.
There are exceptions to this rule, though. One example is if the injuries or death result from your use of an inherently dangerous product like a chainsaw.
Medical malpractice occurs when a doctor or other medical professional doesn’t exercise a duty of care in treating their patients. Not doing so can result in the deterioration of a patient’s health or death.
An example of medical malpractice is as follows. You go in for surgery for issues you’ve been having with your right rotator cuff. When you wake up from the anesthesia, you realize that your left shoulder has bandages around it, and your right shoulder shows no signs of surgery and is still causing you discomfort. A scenario like this may be representative of physician negligence and could warrant you filing a lawsuit to recover compensation for your doctor’s oversight that led to them operating on the wrong shoulder.
While most doctors do their best to help patients, accidents happen, and it’s important to understand the difference between a mistake and negligence. Pennsylvania medical malpractice laws allow you to recover compensation when a physician has been negligent, and you can prove that.
Is It Possible To Be Taxed on a Personal Injury Settlement?
Unfortunately, no answer will work 100% of the time. According to the U.S. tax code, and more specifically documented in the IRS’ Publication 4345, any money received in compensation for physical injury or sickness is not taxable. However, there are exceptions to this rule.
That same publication also clarifies how if you were to claim medical expenses as tax deductions for the bodily injury in previous years, the portion of the settlement awarded for those medical expenses would be taxable. That IRS publication also describes how any claims made for emotional distress caused by the accident will most likely be taxable.
Where To Turn for Help With Personal Injury Lawsuits
While questions regarding whether lawsuit settlements are taxable in your particular situation are best suited for a CPA or tax attorney, our legal team at Shrager & Sachs has all the necessary expertise to determine whether you have a successful personal injury claim and to ensure you recover the maximum compensation possible in your Philadelphia case. Reach out to us to schedule a free case evaluation with one of our competent attorneys. We’ll advise you of the next steps to take in your personal injury case.
Is Personal Injury the Same as Medical Malpractice?