If you’ve recently won or settled a personal injury case, you probably want to know if you’ll have to pay any taxes on the money you received. You certainly don’t want to see a surprise tax bill after all the stress you have been through, and that’s why you should know exactly how the IRS treats different parts of your settlement.
Below, this personal injury lawyer in Plant City, Florida is going to explain some of the key things you should know about taxes in personal injury settlements, and we’ll also share some tips to help you keep as much of your money as possible.
Are personal injury settlements taxable in Florida?
Florida does not have a state income tax, so you don’t have to worry about the state taking a big portion out of your settlement. But federal taxes are a different story.
The IRS has very specific rules about which parts of a personal injury settlement are taxable. In most cases, if you received money due to a physical injury or illness, that part of your settlement is not considered taxable income. So, if you were awarded money for medical bills or pain and suffering directly tied to a physical injury, you can keep that money tax-free.
But not every part of a settlement is off-limits to the IRS.
For example, money received for emotional distress is usually taxable unless the emotional distress was caused by a physical injury. And if your settlement includes reimbursement for medical expenses related to your emotional distress, that portion might not be taxable, depending on whether you deducted those expenses on a past tax return.
Are lost wages taxed?
If your settlement includes compensation for lost wages, that amount is taxable. The IRS sees it as a replacement for the paycheck you would have earned had you not been injured. And just like your paycheck is taxed, so are those lost wages.
Because of this, you should really factor in taxes when negotiating your settlement. You don’t want to agree to an amount thinking you are getting a certain sum, only to find out that a portion of it is getting eaten up by taxes.
An experienced personal injury lawyer in Plant City, Florida can help you structure your settlement in a way that considers tax obligations, so you don’t end up with less than you expected.
What can you do to lower your tax bill on lost wages?
There are a couple of strategies that might help you lower the amount of taxes you might owe on lost wages in a personal injury settlement. One option is to spread out your payments instead of getting one large lump sum. By taking smaller payments over time, you could stay in a lower tax bracket and minimize the overall taxes you owe.
Another strategy is to properly categorize your settlement. While lost wages are taxable, compensation for medical expenses and physical injuries is usually not. If your settlement clearly labels which portions are for what, you could have to pay less in taxes.
An experienced personal injury lawyer in Plant City, Florida can help you structure your settlement in a way that protects more of your money.
What about punitive damages and emotional distress?
Punitive damages are meant to punish the person responsible for your injury and discourage bad behavior in the future. Since they are not meant to compensate for a specific loss, they are taxable. If you receive punitive damages, you will need to report them as “Other Income” on your tax return.
When it comes to emotional distress, the tax rules depend on its cause.
If your emotional distress is directly caused by a physical injury, the money you receive for it is generally not taxable. But if you were awarded money for emotional distress that was not connected to a physical injury, that amount is taxable. However, you might be able to lower the taxable amount if you had medical expenses related to your emotional distress and did not deduct them in a previous tax year.
Looking for a Personal Injury Lawyer in Plant City, Florida?
Have you been injured due to someone else’s negligence and are looking to file a personal injury claim? Ready to partner with an experienced personal injury lawyer in Plant City, Florida who can guide you through the process? If so, look no further than Tonya Stewart and her legal team at Tonya Stewart Law PA. Contact us today at (863) 279-4473 to schedule a free consultation.