Is a Personal Injury Settlement Considered Income in Kansas?
If you have been injured due to the actions or negligence of another person, you may have received a settlement from a personal injury lawsuit. Many people in this situation wonder whether a personal injury settlement is considered income. Knowing whether it will be taxed as income helps people make smart financial planning decisions.
The Internal Revenue Service (IRS) has specific rules about which types of settlements are taxed as income. There are exceptions to many rules, however, which makes this process complicated for many people. An experienced injury lawyer in Wichita, KS, can help you navigate this process of determining whether your personal injury settlement is taxable.
Rules for Taxation
So, is your personal injury settlement considered income? The answer depends. Here are some common types of proceeds people receive from personal injury cases and the rules surrounding them.
Damages for Physical Injuries
If you received damages for a physical injury or illness, those damages cannot be taxed by the IRS. However, there is an important exception: If you have received tax benefits in the past for the same injury, you cannot receive tax benefits again for the same injury in a new year. No double dipping!
Damages for Emotional Distress
Similarly, any damages you receive for mental anguish or emotional suffering cannot be taxed as income as long as the emotional distress was a result of a physical injury. Damages from wrongful death claims are also not considered taxable.
Damages for Lost Wages
Sometimes, victims receive damages for lost wages. The taxation rules on this kind of settlement are complicated; this money may be taxed as personal income, depending on specific state and federal regulations. We recommend reaching out to an experienced attorney for help.
Earned Interest
If you earned interest on any of the money you received from a personal injury settlement, you must pay taxes on that interest.
Punitive Damages
Punitive damages are not considered compensatory in the way that damages for physical and emotional injuries are. Punitive damages are meant to punish the other party for their actions or negligence. Because they are not compensatory, you may need to pay income tax on punitive damages.
Damages for Lost Profits
If you are a business owner and have received damages for your business’s lost profits, there may be tax requirements for that settlement money. An experienced attorney can help business owners ensure they are fulfilling all self-employment tax requirements.
Contact Larry Wall Trial Law
While these guidelines can be helpful, please remember that tax laws are constantly changing. The answer to whether personal injury settlement is considered income depends on many factors.
For specific support about your personal injury settlement taxability, we recommend contacting the team at Larry Wall Trial Law. Larry Wall is passionate about helping clients navigate the complicated landscape of personal injury lawsuits and settlements, like birth injuries, medical malpractice and car or truck injuries. Call 316-265-6000 or contact us online for a free consultation.
