Paying taxes on settlement compensation after a Louisiana accident injury can be confusing, but understanding which portions may or may not be taxed can better prepare personal injury victims.
Taxable | Non-Taxable |
Punitive damages | Settlements from insurance companies |
Interest gained on settlements | Most physical injury settlements |
Non-physical injuries like emotional distress | Physical injuries directly caused by emotional distress |
What portions of a personal injury settlement in Louisiana are typically taxable by the IRS and what is exempt?
Most physical injury lawsuit settlements are non-taxable, while punitive damages, interest earned, and some emotional distress claims may be taxed. Settlements reached with insurance companies out of court are almost always tax-free.
As Benjamin Franklin once said, “Nothing is certain except death and taxes.” But the taxes that can or cannot be incurred by the IRS for a personal injury settlement in Louisiana is an uncertain, complicated issue and worth looking into for added financial protection.
No one likes the financial burden of paying taxes – especially after already physically suffering from injuries after an accident. Understanding all of the facets of a personal injury settlement and which ones are subject to income tax could bring some relief.
Here is a closer look into the applicable taxes that could affect the amount of compensation received from a settlement.
Personal injury attorneys, tax accountants, and professional tax preparers in Louisiana know how important it is for their clients to get the most money they deserve for their settlement.
While more specific conditions or exceptions may vary from case to case, some basic facts and guidelines concerning taxes on personal injury settlements include:
“Personal injury lawsuits can be exempt from taxes, while just about everything else is taxable, from lottery winnings to inheritance money to other types of lawsuits, are.”
According to the United States tax code, Section 104, personal injury lawsuits can be exempt from taxes, while just about everything else is taxable, from lottery winnings to inheritance money to other types of lawsuits, are. Because personal injury settlements do not qualify as income, they will not affect your Louisiana state taxes either.
Basically, any lawsuit that does not result from or include physical harm will be taxed, such as:
Accident victims who sue for compensation for emotional distress, which is usually taxed, will not need to pay taxes on the settlement if the damages are the direct result of a physical injury or illness. Tax-free settlements are reached either through negotiation with the insurance company out of court or settlements reached by a judge or jury.
On the other hand, physical injuries resulting from emotional distress, like migraines or ulcers, are taxable.
Examples of when someone in these cases may have to pay taxes include:
When a victim of an accident has suffered mental or emotional distress because of a personal injury accident, they may be awarded compensation for those pain and suffering damages, which may be taxable income comparable to the compensation received for injuries or sickness.
If someone is in a car accident, part of the personal injury settlement could include compensation for any property loss damages, such as having a car repaired or replaced. Typically, property loss damages are tax-free.
However, there is one exception. If that compensation for property damages exceeds the estimated loss of value, the excess amount will be accounted for as taxable income.
When someone is injured in a personal injury accident by a defendant who intended harm, had an intentional disregard for public safety, or the case involved gross negligence, they may be awarded punitive damages, in addition to any compensatory damages (medical expenses, lost wages, pain and suffering, and more).
Punitive damages are always taxed because these damages are assigned by a court to punish the defendant, not to compensate the plaintiff for any losses caused by injuries. Punitive damages can be reported as “other income” on a tax return.
It is essential to know how to maximize a personal injury settlement before the case is resolved because the settlement may be partially or completely taxable on a tax return.
The process can be confusing since every case is different, so it is beneficial to rely on the professional expertise of a licensed accountant and a personal injury attorney or to contact the IRS.
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