The authority for determining whether you must pay taxes on an insurance settlement is the Internal Revenue Service (IRS). According to the IRS, there is “an exclusion from taxable income with respect to lawsuits, settlements, and awards.”
However, the IRS also notes that “not all amounts received from a settlement are exempt from taxes.” It recommends you speak with a qualified professional to determine if an insurance settlement is taxable.
Does an Insurance Payout Count as Income
For the most part, taxpayers must worry about income received through wages, salary, investments, or other sources. These are the well from which the IRS draws most taxes at the individual level.
For the most part, insurance settlements do not qualify as income. Therefore, typically, they are not taxable.
There Is a Clear Exception to the Settlements-Aren’t-Income Rule
An insurance settlement will typically cover medical expenses and property damage if you are in a car accident. Compensation for these damages and other damages like pain and suffering are generally not taxable.
However, certain insurance settlements cover lost income, which may be taxable. This is consistent with the idea that the IRS is primarily interested in taxing your income. Because you would have been taxed on income you would have earned were it not for injuries, it makes sense that the IRS would tax compensation that replaces that lost income.
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State Statutes May Affect the Taxability of an Insurance Settlement
While the IRS provides the big-picture blueprint for the taxation of insurance settlements, you must also consider prevailing statutes in your state. These statutes could affect the taxes you must or must not pay on an insurance settlement.
An Attorney from Our Team Will Explain the Tax Implications of Your Insurance Settlement
Hiring an attorney for your insurance claim can help in several respects. Understanding tax obligations is one area where an experienced lawyer can help.
If you hire a personal injury lawyer, they can:
- Explain the various losses or damages that entitle you to compensation
- Explain which of these losses or damages is taxable, if any
- Refer you to a tax professional who can ensure you meet any tax obligations
- Answer any questions you have about the taxation of an insurance settlement
Tax issues are never simple. While an insurance settlement can provide great financial relief, it is critical that you cover all tax obligations. This will allow you to move forward without worrying about tax issues related to your insurance settlement.
Do I have to Pay State Taxes on an Insurance Settlement?
The taxation of insurance settlements varies by state. Generally, settlements for personal injury are exempt from state taxes, just like federal taxes. However, portions of the settlement for things like emotional distress, punitive damages, or interest earned might be subject to state taxes depending on the state’s tax laws. It’s important to consult with a tax professional or local tax authority to determine your specific obligations.
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Can Legal Fees Related to a Settlement be dDeducted from the Taxable Amount?
In some cases, legal fees can be deducted, but it depends on the type of settlement. For instance, if part of your settlement is taxable, such as punitive damages or interest, you may be able to deduct legal fees as a miscellaneous itemized deduction. However, the IRS has specific rules regarding legal fees, and with recent tax law changes, it’s recommended to seek advice from a tax professional to ensure you’re following the latest regulations.
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How are Structured Settlements Taxed Compared to Lump-Sum Settlements?
Structured settlements are generally treated the same as lump-sum settlements for tax purposes. If the structured settlement is for physical injury or sickness, the payments are typically tax-free. However, if the settlement involves taxable components, such as punitive damages or emotional distress (not related to physical injury), each periodic payment may include taxable income. In such cases, you may need to pay taxes as you receive each payment.
Do Settlements from Wrongful Death Claims get Taxed?
In most cases, settlements from wrongful death claims are not taxed. Like personal injury settlements, compensation for physical harm (including death) is generally excluded from taxable income. However, if the settlement includes punitive damages or interest, those portions may be subject to taxation. Again, it’s wise to consult with a tax advisor to clarify any specific tax obligations related to the settlement.
You Must Get an Insurance Settlement Before You Worry About Taxation Issues
Before you wring your hands over tax issues, you must get the settlement you seek. Therefore, successfully completing an insurance claim or lawsuit is the first priority.
You can hire a lawyer to fight for the compensation you deserve. A personal injury lawyer from our firm will:
Create a Strategy Specific to Your Case
Among other considerations, we’ll explain whether filing a claim or lawsuit makes the most sense for you. As we create a plan, we will consider:
- The kind of damages you’ve suffered
- The severity of any injuries you have suffered
- The value of any insurance policies that should cover your damages
Our attorneys have represented many clients, each of whom had unique stories. We will create a strategy based on your case and your case alone.
Identify All Liable Parties
Multiple parties can be liable for your losses or damages. We may create a unique strategy for seeking compensation from different defendants. Our team will identify everyone who owes you compensation and determine how to best seek compensation from those parties.
Calculate and Document Your Damages
Whether we are managing an insurance claim or lawsuit, we need to document your damages. Useful documentation may include:
- Images of injuries
- Medical records
- Medical bills
- Invoices for property repairs
- Proof of the time you’;ve missed from work
- Income statements that show how much money you have lost
- Expert testimony about your damages
Our firm will determine the final cost of your damages and use this as the basis for our settlement target.
Demand a Fair Settlement
Our legal team will negotiate a settlement for you. Liable parties often resist paying victims fairly, and that is where our firm proves its value. We will demand the entire financial recovery you deserve, explain our reasoning with evidence and documentation, and stand firm.
Complete a Trial
If your case requires a trial, we’ll fight for you in court. There are unique tax considerations for judgments obtained after a trial, though the general rules remain the same.
Call Van Law Today for Your Free Consultation
Though we can explain the tax implications of your insurance settlement, the Van Law team can do far more than that. We’ll also fight for the settlement you deserve, protect your rights, and allow you to focus on your recovery.
Call Van Law today for your free consultation. We may face deadlines for filing your insurance claim or lawsuit, so we encourage you to get in touch with us right away.
No obligation consultations are always free.
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