With the recently passed 2018 tax reform law in place and tax day right around the corner, you may be wondering if your personal injury settlement is subject to taxation. Prior to tax reform, personal injury awards did not qualify as taxable income. Tax law, however, is complex and confusing—and changing all the time. Can the IRS tax you on your personal injury claim?
Your Settlement is Not Taxable
Those filing their 2017 taxes right now can relax: the IRS will not charge taxes on your settlement proceeds. Under federal and Massachusetts state law, settlements in personal injury cases are not considered income and are therefore are not subject to tax.
Medical Expense Deductions
If you paid medical bills out of pocket and deducted them from your taxes last year, but then you were later compensated for them during a personal injury suit in 2017, you can’t take the tax exemption twice. In this scenario, you must report on your taxes that you were compensated for your previous medical expenses.
If you are awarded a settlement in a personal injury lawsuit, the judge in your case may apply interest to your settlement. Although the actual settlement amount is not taxable, the interest you earn on it must be reported as income on your taxes.
Punitive damages are sometimes awarded to the plaintiff in excess of the settlement amount in order to punish the defendant. Any punitive damages you receive are considered taxable income.
If you are awarded compensation for emotional losses, your out-of-pocket costs to treat your emotional distress may be deductible. However, the remainder of your settlement may be taxable.
Massachusetts State Taxes
Massachusetts state taxes may apply to certain situations. Wrongful death lawsuits can be particularly tricky come tax season. If the wrongful death settlement is awarded directly to the family members of the deceased, it may avoid taxation. However, if it is awarded to the deceased and goes through the state’s probate process, it may be subject to estate taxes. Speak with your wrongful death attorney to address any concerns you may have regarding the taxation of your settlement.
What will 2018 Hold?
The 2018 tax reform laws generally should not impact personal injury cases or workplace claims. If you are pursuing litigation in 2018, Worcester attorney Peter Ventura can help guide you through the intricacies of the new tax laws.
Personal Injury Tax Questions? We Can Help.
Personal injury cases can be complex, so you should always double check with an experienced personal injury lawyer for assistance navigating tax laws. When you work with Attorney Peter Ventura, you’ll have an experienced professional by your side throughout the legal process, including a discussion about the tax implications of your settlement. For a free and confidential consultation, contact us today at 508-755-7535.