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Is my personal injury settlement subject to taxation?

Whether you have been physically injured in an accident, exposed to toxic chemicals or bacteria causing you a physical illness, or were injured in a slip-and-fall, any of those events may cause overwhelming stress in your life due to medical expenses or lost wages. During a time where finances can be stressful, it may be a relief to know that most personal injury damages are not subject to federal or state income taxes.

As a general rule, damages that you are awarded from most personal injury claims are not considered income and therefore not taxable under federal or Massachusetts state law. However, there are always exceptions to the rule. Therefore, before you agree to a settlement or offers from an insurance company, it is important to consult an experienced personal injury lawyer who can assess your situation and give you the best advice on how to proceed with your case.

The rationale behind personal injury damages is to compensate the injured parties in a way that makes them whole again. Your damages are meant to compensate for things such as medical bills, lost wages, and pain and suffering. This money will not be considered income regardless of whether it resulted from a settlement or a jury award, and regardless of whether it is paid out in a lump sum or by payment plan.

Exceptions

One exception that sometimes causes some confusion deals with damages for emotional distress. Because emotional distress is not a physical injury or physical sickness, the cause of the emotional distress will determine whether your damages will be considered taxable income. For example, if your emotional distress is a result of your physical injuries caused by a car accident and associated with physical injuries, those damages will be tax free. Conversely, in situations such as employment discrimination or breach of contract, where you have experienced emotional distress but no physical injury or sickness exists, you may still be awarded damages for emotional distress, but it will be considered taxable income.

Punitive damages are another example of damages that are taxable if awarded in a personal injury case. Unlike traditional personal injury damages that are awarded to compensate you for your loss, punitive damages are awarded in excess of the settlement amount and their purpose is to punish the wrongdoers. Any punitive damages you receive are considered taxable income. It is also important to keep in mind that any prejudgment interest that is incurred during a personal injury suit will also be taxable income. In Massachusetts, the prejudgment interest will end up totaling 1% per month.

Other damages that may be nontaxable are damages from a wrongful death insurance settlement. In Massachusetts, the estate of a deceased can bring a claim for a wrongful death, in cases where -- had the person lived -- he or she would have been able to bring a personal injury claim. Generally, the nontaxable portion of a wrongful death settlement is compensation related to physical injury or illnesses, costs of medical care, equipment, medicine, and emotional stress that is a result of the death. The taxable portion of wrongful death settlements include the interest on the settlement, compensation relating to lost wages or profits, and punitive damages.

Your Personal Injury Settlement

When you feel like you are drowning in medical bills, a tax-free settlement from an insurance company to pay them off sounds like a win. However, working with a qualified personal injury attorney on your personal injury case is very important, because you may be entitled to more than you realize. Although it may be hard to conceptualize the future when you are dealing with the trauma and injuries in the current moment, a personal injury settlement will not only be based medical bills but also future rehabilitation bills, employment losses and other lifelong expenses that are a result of your injuries. Additionally, the award for pain and suffering may exceed all other damages.

To obtain the amount of damages that you will need, you must calculate the lifelong impact the injuries will have on your life. Having a knowledgeable personal injury attorney assist you with this will ensure you will be taken care of in the future. No matter how intimidated you may be about hiring an attorney, the benefits will always outweigh a premature settlement with an insurance company.

If you have any questions about damages, negligence matters, personal injury law, tort law, or other legal issues, please contact our offices. You may schedule a free consultation with an experienced professional today. Call 978-225-9030 during business hours or complete a contact form online, and one of our experienced personal injury attorneys will get back to you.

The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.

Phone: (866) 995-6663
Address: 15 Court Square, Suite 800, Boston, MA 02108