Tax season is upon us once again, bringing up a question that worries many of our clients, whether they successfully won a settlement this year, are in the middle of a lawsuit for compensation, or need compensation after a recent injury:
“Will I need to pay taxes on my settlement?”
Thankfully, for many of you, the answer is “no.”
What the Federal Tax Code Has to Say About Personal Injury Settlements
Just about everything from inheritance to lottery winnings is taxable as income, including money won in a lawsuit. However, the U.S. tax code (Section 104) specifically makes an exception for personal injury lawsuits. This includes workers’ compensation settlements as well.
Examples of lawsuits that are NOT tax-free include:
- Wrongful Termination
- Intentional Infliction of Emotional Distress
Essentially, any lawsuit that doesn’t result from or include physical harm will be taxed. However, accident victims can still sue for compensation for their lost wages and emotional distress (which are typically taxed) without paying taxes on the settlement as long as these damages are the result of a physical injury or illness. It’s important to note the opposite is not true: physical injuries resulting from emotional distress (such as migraines, ulcers, and so on) are considered taxable.
This tax-free status is true for settlements reached through negotiation with the insurance company without going to court, and settlements ordered by a judge or jury.
What the Louisiana Tax Code Has to Say About Personal Injury Settlements
Personal injury settlements do not qualify as income, so they will not affect your Louisiana state tax filing either.
What Are the Exceptions?
As in any circumstance, there are a few cases in which you may need to pay taxes on a settlement.
- If you accumulate any pre-judgment or post-judgment interest on your settlement, the interest can be taxed. However, only the interest can be taxed. The settlement itself will be tax-free.
- If the court awards you punitive damages in addition to compensatory damages (which include medical expenses, lost wages, pain & suffering, etc.), the punitive damages are always taxed. This is because punitive damages are not intended to compensate you for your injuries, but instead to punish the offender.
- If you claimed medical deductions for your accident-related medical bills prior to receiving your settlement, you will owe taxes on your settlement up to the amount you previously deducted.
Have Questions? That’s What We’re Here For
If there is any question over whether a portion of your settlement (such as interest or punitive damages) is taxable, contact your attorney at Dudley DeBosier Injury Lawyers. During the settlement process, your lawyer will specify exactly what portions of what your settlement may be taxed when discussing possible damages with you, the at-fault party, their insurance company, and their attorneys, so you aren’t surprised by a 1090 tax form in the mail after your case ends.
Injuries are stressful, and lawsuits are even more so. At Dudley DeBosier Injury Lawyers, we want to help reduce your stress so you can focus on getting healthy and putting your life back to how it was before the accident. That includes working hard to ensure the money you win stays in your pocket—not the IRS’s. When you contact the team at Dudley DeBosier, you’ll get peace of mind knowing we’ll take care of all those details, so you can get the money you deserve, no strings attached.
If you’re dealing with an injury caused by someone else’s negligence in Louisiana, securing legal representation is critical to obtaining compensation for your damages. Yet, […]Read More
PRESS RELEASE: Dudley DeBosier Injury Lawyers Spread Holiday Cheer with the Launch of 12 Days of Christmas Giveaway 2023
BATON ROUGE, La., [November 30, 2023]— Dudley DeBosier Injury Lawyers, a law firm with offices throughout Louisiana, is delighted to announce its ho, ho, holiday […]Read More
Attorney-client confidentiality is a legal principle that ensures that certain information a client shares with their attorney remains confidential. It’s not just about trust, but […]Read More
Originally published May 31, 2021. There’s nothing quite like riding down the road on your motorcycle, enjoying the breeze. Unfortunately, riding motorcycles can be dangerous, […]Read More