It's important to be aware of your tax liabilities after you receive a lump settlement for a personal injury case to avoid problems with the IRS and other tax entities with administrative authority in your area.
When it comes to taxes and personal injury settlements, the good news is that most settlement money is income tax-free. However, there are some stipulations you need to be aware of to avoid tax penalties.
The following are five important things to be aware of:
You shouldn't have to pay any taxes on settlement money you receive that is meant to cover medical expenses.
Any money you receive that's meant to go toward your medical expenses shouldn't add to your income tax liability at all.
However, there is one detail to pay attention to. If you have already used your medical expenses as a deduction on a past tax return, you will have to pay taxes on any settlement money allocated to your medical expenses up to the amount you've deducted.
You won't have to pay taxes on any money you receive for pain and suffering either.
As part of your settlement, you may be allotted "pain and suffering" money as compensation for pain and discomfort you had to go through because of your injury. This money will not be taxable.
If you happen to receive any interest on a lump settlement, you will have to pay taxes on this interest.
One portion of your settlement amount that could increase your tax liability is any interest that has accrued on your settlement money.
It sometimes happens that interest accrues on settlement funds, especially if the defendant appealed a settlement ruling and later lost on appeal. Interest will accrue on the settlement money between the initial settlement ruling and the appeal ruling, and the settlement receiver will have to pay income taxes on this interest.
You do not have to pay taxes on any part of your personal injury settlement meant to cover lost wages.
A lot of settlement recipients assume that they have to pay taxes on settlement funds meant to cover lost wages because they would have had to pay taxes on the wages if they had received them. However, settlement funds that cover lost wages are not taxable.
If there are any taxable portions of your settlement, you cannot deduct lawyer fees from this taxable portion.
Some settlement recipients assume that legal fees can be deducted from any taxable portion of their settlement to reduce the resulting tax liability. However, this is not the case. You will have to pay the full tax liability on any taxable portion of your settlement regardless of the amount of the legal fees you had to pay in order to win that settlement.
To learn more, contact a company like Banker Law Group.Share