In the United States, out-of-court settlements are the norm for personal injury cases. Whether or not accident victims must pay income tax on personal injury settlements is a frequent question. Given that the Internal Revenue Service (IRS) seems to collect taxes on everything, it makes sense.
There’s a good chance you won’t have to give up any of your case earnings. The winnings from your accident case are often tax-free. Find out more about the various settlement kinds and whether yours is taxable.
Does a Personal Injury Settlement Require Tax Reporting?
Taxing revenue from any source is a well-known practice of the IRS. Winnings from gambling are taxable. The IRS expects you to report bank robberies on your tax return. How much did you settle for your injury?
In most cases, you are not required to record income from a personal injury case on your tax return. Taxes, however, can be due based on the kind of damages that were granted in your case.
Illness or Injuries
The sum of any damages obtained for personal physical injuries or illnesses is exempt from taxation. Your settlement is not taxable if you receive compensation for injuries or illnesses, but did not claim an itemized tax deduction for any associated medical expenses. Your settlement from an injury case does not need to be listed as income on your tax returns.
There are other situations, though, in which you might have to pay taxes. For instance:
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A portion of your settlement may be taxed if you have previously used Form 1040 to deduct medical expenditures for tax purposes.
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If a portion of your settlement is for medical costs that you were entitled to deduct from your taxable income, that sum should be added to your income.
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Pay taxes on this amount of your settlement on a pro-rata basis if you took a tax deduction for a period longer than one year.
Attach a statement to your tax return if you need to record any portion of your compensation for pain and suffering. Your total settlement amount should be listed on your account, less any qualified medical expenses you have already paid for but haven’t yet written off or charges you paid, but didn’t get a tax break.
If you have questions regarding whether or not you need to pay taxes on your injury claim, call Holman Law Firm today at 850-435-6909 and let us evaluate your case.
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