Wondering if your personal injury settlement could get taxed? Though proceeds are typically tax-free, you may owe taxes on portions compensating medical bills, lost wages, or other specific categories. Let’s break down how settlement taxation works.
|Compensation for physical injuries/illness
|Compensation for medical expenses
|Taxable if medical expense deduction was previously claimed
|Compensation for lost wages
|Fully-taxable as wages: Subject to employment taxes
|Compensation for lost profits
|Taxable as business income: Subject to self-employment taxes
|Compensation for punitive damages
|Interest on judgment
What percentage of a personal injury settlement is subject to federal income tax in Nevada?
Typically little or none. The majority of personal injury settlement proceeds, like compensation for physical harm, emotional distress related to an injury, or property damage, are not considered taxable income under federal tax law. Settlement money reimbursing medical costs is taxable if an itemized deduction for the medical expenses was taken in prior years. Compensation categorized as lost income or punitive damages is usually taxable.
The award given for a person’s injuries, medical expenses, or property damage is understood as compensation for a loss. Therefore personal injury settlements are typically tax-free because the settlement proceeds are not considered gross income.
There are some circumstances in which Nevada may tax a portion of the personal injury compensation. Although the specifics should be discussed with an experienced Las Vegas personal injury lawyer, it can be a good idea to be familiar with the fundamentals before doing so.
The portion of gross income known as “taxable income” is used to determine tax liability for a certain tax year. It can be roughly defined as adjusted gross income (AGI) less permitted standard or itemized deductions. Wages, salaries, bonuses, and gratuities are all considered forms of taxable income, as are investment income and different unearned income streams.
Settlements for where loss was incurred will not be included in taxable income. If a person pays out-of-pocket money to cover injuries or damage from an accident and is awarded compensation for those losses, the IRS will not impose any tax on this amount because it is not seen as a form of income but rather as covering a loss of income.
The IRS does make a distinction in certain tort cases where the settlement could be taxed. The IRS will put a distinction on injury awards vs. money given for sickness.
The entire amount of a settlement for personal physical injuries or physical illnesses is not taxed if one did not claim an itemized deduction for medical costs associated with the injury or illness in the preceding years.
The settlement money should not be counted as income. If a person receives compensation for physical injury or physical sickness, they must include it in their income for the percentage of the settlement that represents medical costs they were able to deduct in a prior year or years, to the extent that the deduction(s) resulted in a tax benefit.
When it comes to personal injury claims in Nevada, the majority of the money received in a settlement will not be taxed, but some of it might be. The amount spent on medical care is one category that is subject to taxation. The money received via a settlement for the same medical care would be subject to tax if the medical care obtained as a result of the injury was already given a deductible.
According to the Internal Revenue Service, victims who received compensation for physical injuries through a Las Vegas personal injury claim settlement but did not claim an itemized deduction for medical expenditures will not have their settlement money taxed.
Another portion of a settlement that may be subjected to taxes in Nevada is emotional distress. Emotional distress is common in personal injury cases and will not incur taxes if it is claimed as a damage due to suffering from an injury after an accident. Emotional distress will be taxed when it is a component of a claim that is unconnected to an injury or illness from the accident.
Punitive damages, also known as exemplary damages or exemplary punishment, are financial penalties imposed on the defendant for egregious behavior and/or to reform or prevent the defendant and others from repeating the actions that gave rise to the litigation.
Reporting taxes to the IRS is a serious matter, and one never wants to forget to report earnings. If you are ever questioning reporting a settlement or parts of a settlement, an attorney can help go over what, if any, portions of the settlement need to be reported to the IRS.
While dealing with legal matters such as tax reporting, it’s equally crucial to be aware of other legal procedures in Nevada. For instance, understanding the consequences of a hit-and-run can be vital, especially if you find yourself in such a situation. Similarly, knowing the timeframe for filing a car accident lawsuit can be beneficial. And let’s not forget the risks associated with DUI incidents in Vegas, which can have severe repercussions. It’s always advisable to be informed and prepared.
If not properly reported, the IRS may challenge the non-taxability of a settlement.
After receiving compensation for a court case, it is best to seek the advice of an experienced Las Vegas Car Accident Lawyer before filing your next tax return.
As founder of Gina Corena & Associates, she is dedicated to fighting for the rights of the people who suffer life-changing personal injuries in car, truck and motorcycle accidents as well as other types of personal injury. Gina feels fortunate to serve the Nevada community and hold wrongdoers accountable for their harm to her clients.
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