Personal injury cases can encompass a variety of injuries. Most of those injuries start with a physical injury such as a back injury from a car accident. Some personal injuries, however, can exist without a predicate physical injury. Take for example emotional distress. While emotional distress can be included as a non-economic damage in a personal injury case where there are also physical injuries, an emotional distress personal injury case can sometimes be filed without an underlying physical injury. Sound confusing? It gets even more confusing when you take into account the tax ramifications of a personal injury award or settlement.
Imagine winning a million dollar personal injury jury award only to find out that the Internal Revenue Service was going to tax the money – leaving you with only half at best. Don’t panic yet – most personal injury awards or settlement are NOT taxed. The key is in the definition of income. Over the years the courts have been faced with the task of defining the word “income”. As such, the legal definition of the word income is “all accession to wealth, clearly realized, over which you have dominion. What that boils down to is “anything of value that you receive to do with as you please, for which you do work or because it is obligated by contract“. Of course we all know that Uncle Sam says income…is taxable! So here does that leave personal injury settlement or jury awards?
The good news is that most personal injury settlements and jury awards are not taxable. The government looks at compensation paid as a result of a physical injury as making the person whole again. In other words the plaintiff hasn’t gained anything, she has just been made whole again. Therefore, the federal government has not right to tax that money. The tricky part comes in when the personal injury is not predicated on an actual physical injury . As mentioned earlier, a lawsuit for emotional distress is not based on an actual physical injury. The victim may suffer physical symptoms of the emotional stress but there is not actual physical injury upon which the lawsuit is based. In that case, the compensation received by the victim in a settlement or pursuant to a jury award can be taxed by Uncle Sam.
Clearly, a victim must be careful how settlements in a personal injury case are worded and would always consult with her attorney about the tax ramifications of a settlement before accepting one. Having said all that, the bottom line in most personal injury accident cases is that the compensation received via settlement agreement or awarded to the plaintiff by a jury is generally not taxed by the federal government – which is great news for plaintiffs!
If you would like to discuss the specifics of a personal injury accident case with an experienced California attorney, please schedule a free and confidential evaluation of your case with attorney Emery Ledger of Ledger & Associates at 1-800-300-0001 or at www.ledgerlaw.com.