Filing a personal injury claim can bring financial relief for medical expenses, lost wages, and other damages. However, many people don’t consider the potential tax implications of their settlement or award. A lawyer, like a personal injury lawyer, knows that this is where a tax attorney can be a valuable resource.
When Personal Injury Settlements Are Taxable
You might be wondering when it is time to call a tax attorney after your claim. The taxability of a personal injury settlement depends on how the compensation is categorized. Generally, money awarded for physical injuries or illness is not taxable under federal law. This includes compensation for medical bills and pain and suffering directly related to physical harm.
However, there are exceptions. For instance, compensation for emotional distress, lost wages, or punitive damages may be subject to taxation. A tax attorney can help identify which portions of your settlement are taxable and provide strategies to minimize the tax burden.
Allocating A Settlement
Settlement agreements often include multiple components, such as compensation for medical expenses, lost income, and emotional distress. How these amounts are allocated can significantly impact the taxes owed.
A tax attorney can work with your personal injury attorney to structure the settlement in a way that reduces taxable amounts. This involves careful negotiation and documentation to clarify how the settlement is divided. Without proper allocation, you might face unnecessary taxes on portions of the settlement that could otherwise be excluded.
Handling IRS Reporting Requirements
Receiving a settlement or court award usually triggers IRS reporting requirements. The payer may issue a Form 1099 if any taxable amounts are included. A tax attorney can help interpret these forms and guide you through the process of correctly reporting the income on your tax return.
Failing to address reporting requirements properly can lead to audits or penalties. Having professional guidance can prevent these issues and provide peace of mind as you move forward.
Dealing With Emotional Distress Claims
While compensation for physical injuries is typically tax-free, payments related to emotional distress are taxed differently. If your emotional distress stems from a physical injury, it may qualify as non-taxable. However, if it doesn’t directly result from physical harm, it is usually taxable. This distinction can be confusing, and errors in reporting emotional distress compensation can result in additional tax liabilities. A tax attorney can analyze your settlement and help determine how to treat these amounts.
Getting The Right Help For Your Claim
Attorneys like those at Wandres Law, PC understand the importance of addressing financial concerns during and after a personal injury case. The financial outcome of your claim should benefit you as much as possible, and minimizing tax obligations is a critical part of that equation. A personal injury settlement is often essential for covering recovery-related costs. Working with a tax attorney allows you to make informed decisions about your financial recovery. With proper advice, you can maximize the benefit of your settlement while meeting any legal and tax-related obligations. Speak with a lawyer if you need to file an injury claim and schedule a call with a tax attorney to learn what your next steps are.