It often feels as if there is a tax on just about everything. We pay income tax, sales tax, capital gains tax, property tax, inheritance tax–you get the idea. So it is reasonable to wonder if a settlement you receive for a personal injury claim is also taxable. While the short answer is “no,” there are some exceptions and other complications that factor into a more specific response.
If you have been injured because of someone else’s negligence or intentional actions, you deserve to be compensated and “made whole.” Reach out to a Ponca City personal injury lawyer at BDIW for representation and to ensure you have a clear understanding of the relationship between your settlement and government taxes.
Personal Injury Settlements
When someone else’s actions, or lack of necessary action, causes you harm, you may have grounds for making a personal injury claim. Your best course of action is to create a swift partnership with a personal injury lawyer who will thoroughly calculate your losses and make a settlement demand from the at-fault party.
A settlement demand covers your economic and non-economic losses. Economic losses are those that cost you money—bills, lost wages, and damaged property, for example. Non-economic losses reduce your quality of life. They include your pain, suffering, loss of affection, and other non-tangible costs.
In most cases, your personal injury attorney will negotiate a settlement with the at-fault party’s insurance representatives without taking the claim to trial. Sometimes, the at-fault party does not play fair, and your lawyer will fight for a settlement in court. Either way, the compensation you receive is your personal injury settlement.
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SPEAK TO AN ATTORNEY TODAYHow Much Personal Injury Settlements Pay
Settlement amounts differ from case to case, depending on the circumstances of the accident causing your injuries and the extent of your injuries and their consequences. Typically, a settlement compensates victims for:
- Medical bills and future care costs
- Lost wages
- Lost future earnings and benefits when returning to work is not possible
- Damaged or destroyed property
- Physical pain
- Emotional and psychological distress
- Reduced quality of life
Ultimately, settlement amounts can range from thousands to millions of dollars.
Are Personal Injury Settlements Taxable?
In the United States, we pay both federal- and state-level taxes, so it is important to consider personal injury settlements in light of both tax structures.
Federal Taxes
The purpose of a personal injury settlement is to compensate you for losses you have sustained because of someone else’s actions. You are not “making” money. You are simply being restored or made whole through compensatory damages.
The federal government’s Internal Revenue Service (IRS) does not tax you for funds paid in economic damages and often does not tax you on non-economic damages. When your pain, suffering, and emotional distress is caused by an actual physical injury, the federal government does not tax your non-economic compensation.
However, if you are emotionally traumatized, though not from a physical injury, your non-economic damages can be taxed.
State Taxes
Oklahoma State follows the federal government’s practice regarding taxation of personal injury settlements. Financial awards are untaxed as long as they compensate you for injuries or illnesses caused by another’s negligence.
Wrongful Death Claims
If your loved one is killed in an incident caused by someone else’s negligence, recklessness, or intentional act, your personal injury lawyer can file a wrongful death claim. Through a wrongful death claim, victims’ survivors can recover incident-related medical costs, end-of-life expenses, lost earnings, and compensation for loss of relationship and affection.
Regarding taxation, wrongful death compensation is treated the same as personal injury settlements by the federal and Oklahoma State governments.
Punitive Damages Can Be Taxed
Some personal injury cases warrant the pursuit of punitive damages. Punitive damages are not compensatory–they do not recoup your losses. Rather, punitive damages punish the defendant for their egregious behavior.
Not all personal injury claims provide grounds for seeking punitive damages. Oklahoma Statute 23-9-1 establishes conditions allowing for punitive damages and potential limits on the amounts received. If you deserve them, your attorney will fight hard to secure them.
Since punitive damages are not compensatory, they are subject to taxation by federal and state governments. Settlement language matters, and an experienced personal injury lawyer from BDIW will know how to construct the wording of your settlement to best protect your award.
Other Exceptions
Though the tax policy for personal injury settlements is generally straightforward, there are “before and after” actions you may take that could complicate the situation.
Itemized Medical Tax Deductions
There are times you may have to declare some of your personal injury compensation as income on a federal and/or state tax return. For example, you may have claimed tax deductions for medical expenses in the months before finalizing negotiations and receiving your settlement.
Your settlement would include coverage for the costs you had already received tax deductions for, so you would actually be “gaining” income from the settlement, not just recouping losses.
Your personal injury lawyer will advise you so you make any required tax declarations.
Interest-Bearing Accounts
If you receive non-taxable compensation but put the money in an interest-bearing account, the interest is taxable. It is seen as additional income since you are making money from your recovered losses.
How an Oklahoma Personal Injury Lawyer Will Help
The team at BDIW will not overlook any losses caused by your accident and injuries and will demand and negotiate a fair settlement. Beyond that, we will be especially attentive to the language of your settlement, ensuring all your losses are classified properly to protect you from unfair taxation or accidental tax misconduct.
You Deserve to Be Made Whole
The team at BDIW has won substantial settlements for Oklahoma’s personal injury victims for decades, and we are ready to help you secure the compensation you need to be made whole. Our personal injury attorneys understand how settlements work and will fight to get you the highest amount possible. Reach out today to schedule a free consultation with a knowledgeable personal injury lawyer. We look forward to hearing from you.
