Are Lawsuit Settlements Considered Taxable & What Should I File?

The money provided from lawsuit settlements is considered an added income and often taxed under the Internal Revenue Service (IRS), a revenue collecting governing body under the US federal government. The IRS is entrusted with collecting taxes and determines what amount of settlements received against the damages can be collected.

Broadly, there are two divisions the department creates. Depending upon its categories, lawsuit settlements and damages are usually taxable and non-taxable. This article looks into the sub-categories of injuries divided into taxable or non-taxable and which lawsuit to file further.

Taxable lawsuits

A settlement is ideally a point of convergence reached between disputing parties regarding a case where the accused agrees to give up any further legal proceedings against the issue and to pay the agreed amount of money from an insurance company. The victim’s payment is usually considered a separate “income,” and it brings in the entire dicey process of separating the settlements.

Here are some of the significant lawsuit settlements that are taxable:

  1. Damages and Interest– Any attorney fee that requires a pre/post court judgment interest can be taxable, and the same applies to any damages awarded. This scenario can also present one with attorney fee problems. Hence, it is best to consult a personal injury lawyer in Marietta for professional help because this process can get tricky.
  2. Lost Wages– Lost wages are considered taxable because they fall under the category of “income,” however late or delayed the payment has been. In case one had not suffered loss, the income would have been taxable, which is precisely why lost wages still fall under the radar of taxes.

Non-taxable lawsuits

Similarly, here are the lawsuit settlements that remain non-taxable, albeit with some exceptions to the general rules:

  1. Emotional Distress Claims– Any mental and emotional distress one has suffered from related to the injury is non-taxable as long as it can be proven that the mentioned emotional trauma was caused by the physical damage only. Otherwise, one is liable to be taxed with the settlement money.
  2. Physical Injury Claims– Visible physical injuries are almost always non-taxable because they include “bodily harm.”
  3. Car Accident Injury Claims– Car accident settlements are never taxed, but only until a lawyer chooses to work for contingency fees (where they receive payment after a successful case.) Although many like that best car accident attorney in Marietta will have the prerequisite to avoid such taxes, in many cases, it is not fruitful. In this situation, the fees can be taxed. Hence it is best to choose slip and fall attorneys in Atlanta whose contingency costs will not be taxed.

What Should I file?

The victim needs to calculate all the possible damages, both economic and non-economic,

physical and emotional, with their respective lawyers and attorneys. The goal is to properly allocate the injuries during the tax filing to avoid loopholes, although being honest regarding those damages at all times. Professional help and consultancy in these cases are essential during tax filing.

Determining the number of non-taxable damages is also crucial because the IRS department can always seek to challenge any settlement if they so feel. Hence, one should truthfully and overtly conclude what amount of damages lean towards being taxable and what amount does not, especially why you think that way.

While the entire allocation system and the consequent filing can be complicated, trusted consultancies like The Hurt 911 Injury Centers can provide you with all updated and trustworthy information regarding taxes and help you with any further inquiries. You can call us at 1-800-487-8911 to schedule an appointment with our experts.