If you were hurt in an accident and got a personal injury settlement, you might be wondering if you have to pay taxes on the money. As with most tax situations, the answer isn’t as straightforward as a yes or no. To understand the details concerning your unique settlement, we recommend speaking with a CPA. The following general facts, however, apply to the vast majority of communities. Contact Law Offices of Fernando D. Vargas for a free legal consultation if you have not yet been granted a settlement.
Factors to consider when deciding whether or not to pay taxes on your personal injury statements
If you had medical expenses deducted from your taxes the previous year, if you received punitive damages, if you received a settlement for lost profits from a business, how much you are receiving for lost property values, and if you are receiving interest as part of your settlement, these are some of the factors that will influence whether or not you owe taxes.
Damages for emotional distress, physical injuries, and mental anguish are all subject to taxation
In most situations, if you obtain a settlement for bodily injuries (including emotional discomfort and mental agony), you will not have to include it as part of your earnings or income. There is, however, one important exception to this rule: Deducted medical expenses.
You may be obliged to report medical expenditures on your settlement for medical expenses if you deducted medical expenses on prior years’ income tax and earned a tax advantage for those payments. If you get compensation for emotional suffering or mental agony that is not related to a physical injury, you must claim those damages as income.
Damages for lost profits are taxed
If you are a company owner who lost profits as a result of your accident and receive compensation for it, it’ll be deemed net earnings and liable to self-employment tax. These forms of damages should be reported on your tax return as “business revenue” by your accountant.
Damages for lost property value are taxed
Property loss damages are frequently included in personal injury settlements. Unless the amount you get exceeds the adjusted basis of your property, they are normally not taxed. This will be deemed income and will need to be reported. For example, if your automobile was totaled in a car accident and you were compensated for replacement value rather than current value, the difference would be taxed.
The best person to get you the answers you need is an account
The truth is that only an accountant can assist you comprehend the nuances of what will be taxed and what will not. Law Offices of Fernando D. Vargas can assist you in maximizing your settlement by providing legal services. To get started, call 909-982-0707 right now for a legal consultation.
