Most personal injury cases settle before or during trial, and only a small percentage reach a verdict. Acceptance of the defendant’s offer settles the case. Your Vermont personal injury lawyer will then need to notify the defendant’s lawyer that you will accept the settlement. Then, once your lawyer has received the contingency fee, you receive your settlement. However, these proceeds can sometimes be taxed. This article addresses tax issues over personal injury settlements and awards.
Personal Injury Compensation Not Taxable
As a general rule, proceeds from a personal injury claim are not taxable under either federal or state law whether settled before or after filing of a lawsuit to enforce it. Neither the federal government by the Internal Revenue Service (IRS) nor the state can tax proceeds from a settlement in most personal injury cases. Federal tax law excludes damages from personal physical injury or sickness from taxpayer gross taxable income.
Typical personal injury damages that compensate claimants for lost income, medical bills, emotional distress, pain and suffering, loss of consortium, and lawyer fees are not taxable if they are results of physical injuries or illnesses.
Exceptions to the General Rule
Even if they suffer physical injury or illness, claimants may be taxed on damages for a breach of contract that caused the injury or sickness and is the basis of the lawsuit for damages.
Punitive damages are always taxable. On a punitive damages claim, plaintiff lawyers always ask the courts to separate verdicts into compensatory and punitive damages to demonstrate to the IRS how much of the verdict was for non-taxable compensatory damages.
Another taxable part of a personal injury verdict is interest on a judgment. Most state court rules add interest to the amount of the verdict for the time a case took for full satisfaction of the judgment. For a case filed on January 1, 2012, the plaintiff would receive interest from January 1, 2012 until full payment of the judgment. If the plaintiff wins at trial on January 10, 2013, but the defendant appeals and does not pay the full amount of the verdict until March 31, 2014, the plaintiff receives two years, two months, and three weeks of interest, which is taxable.
Claims for Emotional Injury Only
The settlement or verdict proceeds are non-taxable only if for a physical injury or illness. Proceeds on a claim for emotional distress with no actual physical injury are taxable unless the plaintiff can prove some concomitant physical injury, even slight.
Make as Much as Possible Non-taxable
If there are two claims against a defendant, a large one that relates to a physical injury and a smaller that does not, the settlement agreement should state explicitly how much of the settlement relates to the larger physical injury claim and what how much to the smaller claim. While the IRS may challenge the asserted non-taxable status of a settlement, explicit description offers the best chance of keeping most of the settlement proceeds tax-free.
Consult an Esteemed Vermont Personal Injury Lawyer
After a severe accident, the injured victim, often with the aid of a Vermont personal injury lawyer, must seek financial recompense for medical bills, lost income, and rehabilitation costs by making an insurance claim, which the insurer may deny. Then comes the time for litigation, and the claimant’s Vermont personal injury lawyer files and serves the documents necessary to inform the defendant and the court that the claimant client will go to trial if necessary to prove entitlement to full and fair compensation.
Skilled and experienced, learned in personal injury statutory and case law, and comfortable and competent in courtroom encounters, Vermont personal injury lawyer Joe Galanes from Galanes Law has helped clients injured at work, in car and truck crashes, and by dangerously defective products, nursing home abuses, and dog bites all over northern New England.
Joe manages his caseload for high-quality practice and personal attention to clients. He accepts cases on a contingency fee basis that costs clients nothing unless and until they receive settlement proceeds from defendants or awards of damages from the courts. There is no investment better than the no-money-down, no-risk arrangement of contingent representation, and there is no substitute in litigation for the advice and advocacy of professional legal counsel. Call (802) 698-8356 today for a free case consultation.