How much will I be able to keep?
Our lawyers are frequently asked about the taxes that must be paid on monies from a personal injury settlement. The general answer is that the IRS and Alabama Department of Revenue do not consider personal injury settlements to be “income”. Rather, the money is deemed to be reimbursement or compensation for something was lost. As such, most car accident, workers comp or other injury claims go tax-free.
Are there any exceptions?
As with any rule of law, there are certain instances when some of the money recovered is not tax-free. For example, if part of the settlement or jury verdict is labled as lost income or wages, this money would be taxable as ordinary income. Only mental anguish or emotional damages are tax free when the money is divided into specific or itemized categories. A good personal injury lawyer knows how to draft the paperwork and release to minimize tax consequences. The same lawyer will also correctly advise that settlement of an injury claim is easier to shield from the tax liability than if it goes to trial with a public jury verdict in which damages are itemized.
What about punitive damages or wrongful death claims?
Remarkably, the IRS has deemed wrongful death settlements or verdicts as tax free. Punitive damages, the only kind of recovery that can be had in a wrongful death suit, are considered a bereavement award or death compensation to the family.
While the money you get from an injury settlement may technically be tax-free, it still must be declared and disclosed on your tax return. Your accountant or tax-preparer may need a copy of the settlement papers in order to properly claim the monies as tax-free.
Visit this IRS link for more information on this topic.