When you hire one of the personal injury attorneys at the offices of John D. Halepaska, you’re getting a full-service experience from start to finish in your case. As a plaintiff, we’ll walk you through every possible element of the case, including the vital settlement or judgement phase that tends to complete these cases.
Whether your case ends in a settlement or a judgement from a court, one area we’ll be sure to remind you of so it isn’t forgotten is the tax consequences of any funds you’re being paid as part of the case. Particularly since tax reform laws passed in 2017 brought higher taxes to lawsuit settlements, understanding how a case payment may impact your taxes is a very important factor to consider. Here are some basics on important themes to think about here, plus some specific items to go over.
Pre-Settlement Agreements and Attorney Fees
For starters, in any settlement situation – situations that make up the bulk of personal injury or related cases – you should be discussing potential tax ramifications before the settlement is done. This conversation will include both the plaintiff and the defendant. While these agreements are not binding to the IRS, they’re considered legally upholdable in most cases and generally won’t be disputed.
Another important area to consider here: Attorney fees. In some cases, litigants will be taxed on 100 percent of the funds they recover – even including those they pay to an attorney as part of their fee. But in non-taxable cases, such as many auto accident settlements, attorney fees are not included in the taxable amounts. Just be sure you know which situation is applicable to you.
Whether you’re taxed, and how much, during a personal injury case will depend on the claim origin. In cases where this origin is designated as compensation for either emotional distress or wages lost, taxes will generally be applicable. In some other circumstances, they will not.
One area that’s virtually always taxable: Punitive damages, or damages ordered paid by the defendant over and above the actual cost of compensation. Down similar lines, if your settlement includes interest in any way, those portions will be taxable.
Physical Injury Exemption
Now, one area that’s often considered exempt from taxation here is physical injury or sickness. This category used to apply to all personal injury damages whatsoever, but this changed in 1996 when new laws were passed. Since then, taxes are not applied to specific physical injuries. The determination of whether damages are considered physical or emotional is generally resolved during a final settlement, or simply determined by the court in cases that do not reach a settlement and instead require a judgement.
For more on the tax ramifications of personal injury cases, or to learn about our car accident, motorcycle accident or product liability attorney services, speak to the staff at the offices of John D. Halepaska today.