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Tax Cut: Do You Have To Pay Taxes On A Personal Injury Award?

24 June 2015

Alexis Garcia

They say there are only two certainties in life: death and taxes. With the speed at which medical technology is advancing, though, it may be possible to escape death at some point in the future. However, the taxman will almost always want a share of any income you receive, and awards from personal injury lawsuits are no exception. Here's what you need to know about paying taxes on the judgment awards you receive on your trucking accident case, so you can prepare for tax day.

Tax Exemption Depends on Relation to Injury

Whether or not you'll have to pay taxes on your personal injury award will depend on what you're being compensated for and how it relates to any physical injuries you sustain or physical sicknesses you experience.

Compensation for expenses you incurred taking care of the physical harm you suffered are not taxable. For instance, you were awarded $20,000 for the medical bills you paid treating several broken bones and other injuries you suffered in a trucking accident. The IRS deems this money is not taxable; therefore, you would not need to include it on your tax returns.

There is an exception to this rule. The IRS lets you write off medical expenses that exceed 10 percent of your adjusted gross annual income (AGI). So if your AGI is $100,000 and your medical expenses for the year totaled $25,000, you can write off $15,000 of that amount on your taxes. If you do that, though, you would have to pay taxes on $15,000 of your personal injury award when you get it.

You should talk to an accountant about the pros and cons of writing off medical expenses when you are expecting to be compensated for them. You can amend your tax returns any time to include deductions you may have missed. So if you opt not to take the medical expense deduction for that year because of your lawsuit but you don't end up recovering that money from the defendant, you can go back and change your tax return to include it.

Be aware, though, that you only have three years from the original filing day to claim a tax refund. You'll need to keep this deadline in mine if using the medical deduction will result in you getting money back from the IRS.

Emotional Distress and Mental Anguish

Awards for the mental or emotional trauma you suffer from the accident with the truck may be taxable depending on the source of your pain. If your emotional or mental suffering is caused by your injury, the money you receive would be non-taxable. You fell into a depression because of the constant pain from your broken limbs, for example. You would not have to report the money you receive for this as income.

On the other hand, if your pain and suffering has nothing to do with being injured, then the money you get would be taxable. For instance, you were hit by the truck but were not hurt. However, you developed an anxiety disorder because of the incident. Since your emotional distress didn't arise out of a physical injury, you would be liable for taxes on your settlement or court award.

Sometimes awards for emotional or mental suffering can get messy if you were injured. You may be given money for distress that arises from your injury as well as suffering that's related to the incident but not from being hurt. You'll need to work with your attorney to determine how much money should be assigned to each category so you know what to put on your tax return.

Lost Wages and Profits

Money you receive for lost wages and profits is taxable. Additionally, you'll have to pay the Social Security and Medicare tax on the cash you receive for lost wages. The lost wages includes anything you would have earned or received had you been working/employed which includes severance pay, back pay, advances, bonuses etc.

Lost profits refer to money you would have earned had you been able to perform your trade. This money is subject to self-employment tax, which actually is the Social Security and Medicare tax you would be required to pay if you were employed by a company.

Punitive Damages

Punitive damages are typically awarded in cases where the defendants' actions or behavior were so egregious that it warrants financial punishment to discourage a repeat of the same behavior in the future. Money you receive for punitive damages is considered income and will be taxed.

Property Damages

If the accident causes your property to lose value, you don't have to pay taxes on money you receive to compensate you for that lost value as long as you receive less than the adjusted value of the property. For instance, if your car's worth dropped from $15,000 to $10,000 because of the structural damage caused by the truck but the company only gives you $3,000 in compensation for it, then you wouldn't have to pay taxes on that money. However, if the company paid you $6,000, then the extra $1,000 would be viewed as income and subjected to taxes.

As you can see, you can incur quite a tax burden when you receive a court or settlement award for a truck accident. To reduce this burden, it's essential that you ensure most or all of your award lands in the non-taxable column. Work with your attorney to ensure that any settlement agreement specifically lists what the money is being paid for so you can accurately report this income on your taxes and avoid an unpleasant audit by the IRS. For more information look at firms like Gabrielson Law Offices, Ltd.

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