Do You Pay Taxes on a Settlement?
If you have been injured in an accident, there is a good chance that you have filed a claim with your insurance company. If they have offered you a settlement, you may have wondered if you will have to pay taxes on the money you receive. Whether or not you will have to pay taxes depends largely on the reason you were given the settlement. You will normally not have to pay taxes on a personal injury settlement, but there are a few notable acceptions.
Settlements That are Tax-Free
If you have been awarded money for medical bills including medication, or if you have received compensation for emotional distress due to sickness, you will not have to pay taxes. However, new tax laws state that if you have physical sickness caused by emotional distress, you must pay taxes on any money you receive for damages. Florida does not have an income tax, hence, you will not owe state tax money if you have been compensated for lost wages.
Settlements that are Taxed
There are a few situations in which you will definitely be taxed on a settlement. If you were awarded funds for lost wages, you will owe federal taxes for those wages. If your settlement includes any kind of interest, you are likely to be taxed on that interest. If you are compensated for emotional distress that is not directly related to an accident, you may end up owing tax money.
In a case where you have taken an insurance company or at-fault driver to court, you may receive punitive damages. Punitive damages are awarded to an accident victim to punish an at-fault driver after an accident. They are awarded to a plaintiff in addition to the money they will get for medical damages. Because these damages are extra income for the plaintiff they are considered taxable.
There are some personal injury lawsuits that include damages for invasion of privacy. For example, a person may have had private information released about them after a high profile accident. As these damages are not directly related to the injury, they are usually taxable.
In many personal injury cases, a crash victim will file multiple insurance claims. A legitimate settlement agreement will state how much money is being allocated to each claim. It is beneficial to the plaintiff if the majority of the money is allocated towards personal injury.
Settlements that Might be Taxed
If you have claimed medical expenses as a deduction on your taxes and you then get an insurance settlement for that injury, you must report the settlement to the IRS and you may end up owing money.
Finding an Attorney
Before you accept a settlement from any insurance company, you should always consult with a personal injury attorney. Insurance companies have entire departments devoted to keeping your money in-house. You need a lawyer who is well versed in Florida law and has years of experience in negotiating with insurance companies. An experienced law firm will research your case thoroughly and give it the attention it deserves.
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