Any event that causes you to suffer a personal injury is one that you do not anticipate and,therefore, you do not contemplate the unintended consequences of such an event. One thing is for certain: If you are personally injured, the thing furthest from your mind is the tax consequences of a personal injury award, or personal injury damages. Of course, your first, and most important priority is securing your physical safety and making those first steps toward recovery. That is our priority too. Then you begin to want to be made whole after the injury you suffered. At that point,
you might seek our legal advice. And we are absolutely here to help when you make that choice.
The purpose of this post is to make you aware of some the tax consequences associated with personal injury recovery awards, should we secure one on your behalf. Please note: There is no guarantee that a verdict will be returned in your favor and we cannot predict the amount of damages you will receive in the event of a favorable verdict. We just want you to know how this may or may not impact your federal tax return.
1. First, it is important to understand that the United States Code (the Code) provides the public with guidelines to determine taxable income. The Code also statutorily authorizes a number of other things, such as deductions, exemptions, and credits, but we will focus solely on taxable income. Practically any amount of money or the fair market value of services or property received, is included in your taxable income. There are a number of exceptions and we will explore one of those sections as it relates to personal injury. Bottom line: If you receive a sum of money, the starting point is to assume it is income (and included on your tax return) unless an exception applies.
2. Personal injury awards are covered in § 104 of Title 26 of the Code. This section provides you, the injured plaintiff, with an exception. If you are awarded damages on account of personal physical injury or physical sickness, the amount of that award is not included in your gross income. This exception applies regardless of the method by which you receive your payments, either as a lump sum or as periodic payments. Additionally, it does not matter if we come to a
settlement agreement on your behalf or if the matter is decided in court. The exception is still available.
3. One important thing to know about this exception for personal injury damages is its application to punitive damages. If your injury was egregious and resulted from the serious fault of another,your attorney may ask the court to award you money in excess of your out-of-pocket expenses, or the amounts paid by your insurance. These awards are typically referred to as punitive, or exemplary, damages. If you receive this type of award, regardless of its dollar amount, you will be responsible for reporting the amount on your tax return. The personal injury exception does not apply to these amounts and it will be included in your gross income. If your attorney is seeking this type of award, it is very important that you discuss the tax consequences with your attorney. That attorney will be able to adequately advise you how to best prepare for the tax liability. A skilled personal injury attorney will be able to help you best understand your recovery options and how to best manage an award of damages, if you receive one.
I am here to help you navigate the legal system following a personal injury event, so that you may care for yourself and your family during recovery. My team and I are ready to help. We will be honest about your options for recovery and we will provide you with the necessary knowledge to make appropriate decisions as a taxpayer. Please give us a call and let us see how we may be of assistance to you.