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Receiving a favorable verdict and a personal injury settlement can feel like a huge relief. After months of pain, paperwork, and waiting, you finally receive financial compensation for your injuries and damages. But once the check arrives, another question often comes up: Do I have to pay taxes on this money? Essentially, worrying whether your personal injury settlements are taxable is a fair concern. Since these injury settlements may be large, you don’t want to be caught off guard when tax season arrives.
The truth is, not all settlement money is treated the same. Some parts may be tax-free, while others could be considered taxable income. In this article, we’ll break down what the IRS says about personal injury settlements and which portions are taxable. Also, we will provide vital tips on how to protect yourself from unexpected tax bills and stay financially secure with tax-free lawsuit loans from High Rise Financial while your case is ongoing.
Are Personal Injury Settlements Taxable Under Federal Law?
In most cases, the money or settlement payout you receive for physical injuries or illness is not taxable. The IRS generally does not consider this type of financial compensation to be income. That means if you were hurt in a car accident, slip and fall, dog attack, or other incident and recovered damages to cover your medical bills or pain and suffering, you likely won’t owe taxes on that portion.
However, not all parts of a settlement are treated the same. The IRS looks at how the money is categorized. If your settlement includes compensation for lost wages or punitive damages, those portions may be taxable. Hence, it’s important to understand the breakdown of your settlement so that you can know what to report and what to exclude.
Which Parts of a Personal Injury Settlement May Be Taxable?
Here’s a simple breakdown of which parts of a settlement are usually taxable and which are not:
- Compensation for physical injuries or illness: This is generally not taxable. If you were physically hurt and received money to cover medical expenses or pain and suffering, you don’t need to report it as income.
- Emotional distress not tied to physical injury: If you received money for emotional distress but did not suffer a physical injury, that portion may be taxable. The IRS treats it differently unless it’s directly linked to a physical condition.
- Lost wages: This part is taxable. If your settlement includes money to replace income you missed while recovering, it’s treated like regular wages and must be reported.
- Punitive damages: These are always taxable. Punitive damages are meant to punish the wrongdoer, not compensate you for your loss. The IRS considers them income.
- Interest earned on the settlement payout: If your financial compensation includes interest, such as money that accumulated while the case was pending, this portion is taxable.
Therefore, understanding the category or type of damages that make up the entire settlement payout can help you prepare for tax season and avoid surprises.
Do State Taxes Apply to Personal Injury Settlements?
Unlike federal tax laws that are often straightforward, state tax laws usually vary, depending on jurisdiction. Some states follow federal guidelines closely, while others may treat certain parts of your settlement differently.
For example, a state may tax emotional distress or lost wages at a different rate than the IRS does. To be safe, it’s a good idea to speak with a local tax professional or attorney. They can help you understand how your state handles personal injury settlements and make sure you’re following the rules.
How to Avoid Tax Surprises After a Settlement
Receiving a settlement is a big moment, but it’s also a time to stay organized. Here are some tips to help you avoid tax trouble:
- Ask your attorney for a breakdown: Before you receive your settlement, ask your lawyer to explain how the money is divided. Knowing what each portion covers will help you report it correctly.
- Keep detailed records: Hold onto your settlement agreement, medical bills, and any documents that show how the money was calculated.
- Consult a tax advisor: A professional can help you file your taxes properly and make sure you’re not paying more than you should.
- Don’t assume it’s all tax-free: Even if most of your settlement is exempt, small portions may still be taxable. It’s better to double-check than to guess.
- Report only what’s required: Also, if you’re unsure what to include on your tax return, ask for help. Reporting too much or too little can lead to problems later.
Can You Get a Personal Injury Lawsuit Loan Without Affecting Your Taxes?
Yes, you can get a personal injury lawsuit loan without affecting your taxes. A personal injury lawsuit loan, also called pre-settlement funding, is not considered income. That means it does not affect your taxes. You don’t have to report it, and it won’t increase your tax bill.
These lawsuit cash advances are based on the strength or merits of your legal case. You receive the pre-settlement funding upfront to help cover living expenses while your lawsuit is still pending. There are no monthly payments, and you only repay if you win your case. If you lose your case, you owe nothing.
What’s more, since a lawsuit loan is not income and not taxable, the legal funding is a safe way to stay financially stable during a long and complex legal process. It gives you breathing room without creating new financial obligations or putting you into more debt.
Apply for Tax-Free Personal Injury Lawsuit Funding Today
If you’re waiting on a personal injury settlement and need immediate financial support, High Rise Financial can help. Our personal injury lawsuit loans are tax-free, non-recourse, and can help you achieve financial relief while your case is still pending. Call us at (866) 407-6404 for a simple consultation or to apply online today. Get the financial help and lawsuit cash advance you need now without worrying about taxes later.