Personal Injury Settlements And Taxes: Things You Should Know
When your attorney lets you know that your case has been settled, you may eagerly be anticipating the check you will receive for the damages. Before you receive this money, it might be wise to understand the tax implications it comes with. By knowing this, you will be able to plan accordingly, you can remember to view the settlement amount more realistically.
Taxable Damages vs. Non-Taxable Damages
The government views some types of settlement awards as taxable and others as non-taxable. Any amount awarded for physical damages is exempt from taxes. In other words, if you were physically injured and won the case, you would not pay any taxes on the amount you won for this.
On the other hand, if you sued for something that did not cause physical injuries, you would be suing for punitive damages. Punitive damages are designed to punish a person for what they did, and these damages are taxable.
In many cases, clients win money for both of these, and that is why it is important to make sure they are separated on the documents. If you separate them, you can prove to the IRS that you only owe taxes for part of the settlement amount instead of the entire thing.
A Way to Minimize Taxes on Settlements
Winning a large settlement can be exciting, but it can also be overwhelming. Receiving a lump-sum payment after the case settles could cause several problems:
- You might mismanage the funds because of the distress you are going through.
- You might incur a huge tax bill because of it.
There is an alternative option that you may want to consider when it comes to the way you receive your settlement. This option is called a structured settlement, also known as an annuity. With an annuity, you will not receive a lump-sum amount when the case settles. Instead, you will receive a stream of equal payouts for a certain number of years, or for the rest of your life.
You may have the option to state how many years you would like it to be spread out, and you may also be able to choose the frequency of the payments. By choosing this option, you would spread out the income from the settlement over many years, and this would reduce the tax liability you would experience from this.
If you have any questions about your settlement amount, taxes, or annuities, talk to your personal injury attorney.
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