Author: Cheyenne Meek
Tax season can be confusing enough without the added stress of deciphering how your personal injury settlement affects your taxes. If you’ve recently received a settlement, or you’re gearing up to file an extension, you’re probably asking questions like:
- “Do I owe taxes on this settlement?”
- “What if my settlement includes emotional distress or lost wages?”
At Saunders & Chabert, our goal is not just to secure the compensation you deserve, but also to help you understand exactly what it means for your financial future—especially around tax time.
What Parts of a Personal Injury Settlement Are Not Taxable?
According to IRS Publication 4345, settlements related to physical injuries or physical sickness generally aren’t taxable, provided you haven’t previously deducted those medical expenses. Additionally, compensation received for pain and suffering directly linked to your physical injuries is typically non-taxable.
- Medical Expenses: If your settlement reimbursed medical expenses that you haven’t previously claimed as deductions, these are not taxable.
What Is Taxable in a Settlement? (And What to Watch Out For)
Certain aspects of your settlement could be taxable. It’s crucial to watch out for:
- Lost Wages: If your settlement includes compensation for lost wages, that amount may be taxable as income since it replaces earnings you would have otherwise received.
- Punitive Damages: While rare, punitive damages—awarded in cases of gross negligence, intentional harm, or drunk driving incidents—are taxable.
- Interest: Any interest earned on delayed settlements or judgments is also taxable.
Received a 1099 form related to your settlement? That’s typically a signal that part of your settlement may be taxable. Reach out to a tax professional and your attorney immediately to clarify this issue.
At Saunders & Chabert, we don’t just fight for your maximum recovery—we proactively guide you through the settlement process, ensuring you know exactly what to expect when tax season arrives.
How to Prepare for Tax Season After a Settlement
Here’s how to ensure you’re ready for tax time after receiving a settlement:
- Documentation: Should the IRS have questions about your return, you’ll need thorough documentation to prove which settlement portions were for non-taxable physical injuries.
- Consult Professionals: Always discuss your settlement with your attorney and a tax professional after a substantial payout.
If you’ve recently received a settlement or have questions about how it affects your taxes, contact Contact Saunders & Chabert today to schedule a free consultation—we’re here to guide you.