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So you just received a big cash payment after winning a personal injury claim. We all know that death and taxes are inevitable in this fantastic world we live in.

Not so fast, there are gray areas, and sometimes the law is quite vague, which leads to some loopholes.

About 95% of personal injury lawsuits go through – the rest are settled out of court.

Let’s take a look at the general rules and see if you have to hand over a large portion of your payment to the tax authorities.

We will also try to answer the question “is a court settlement taxable?” “

Although different states have different rules, we’ve chosen the state of Florida to focus on for this article.

What is the general rule?

The general rule is that compensation for personal injury is not taxable. This prevents both the IRS and your state from taxing you on the proceeds resulting from a personal injury claim.

Any compensation for loss or damage resulting from bodily injury or physical illness is not taxable. Thus, attorney fees, medical bills, lost wages, loss of consortium, and emotional distress are not taxable, provided they were all incurred as a result of injury or injury. sickness.

This is true whether you received your reward in the form of a pre-trial settlement or after a jury verdict.

Exceptions to the general rule

Punitive damages, although rare, are always taxable. These are distinct from compensatory damages. If you are entitled to punitive damages, your lawyer should go to court to delineate the punitive and compensatory amounts. This will avoid subsequent disputes with the IRS.

One notable exception is that any interest earned and allocated will be taxable. In addition, the interest added to the debt by the court to account for the loss of interest during the term of the judgment is taxable.

Any part of your compensation that was made for lost income is taxable. It is important to remember. The IRS doesn’t care who paid you the money. If it is paid income, it is taxable.

Emotional distress may or may not be taxable. For example, it will not be considered taxable income if you have suffered emotional distress directly as a result of the injury. However, if the distress is not related to the injury, it will be taxed.

If you have a case based on a breach of contract that resulted in illness or bodily injury, then your settlement will be taxable. So it depends on whether your claim is based on breach of contract, bodily injury or illness.

If you have two claims against the defendant and one is a personal injury claim and the other is not based on personal injury, it is essential to delineate those claims as one is taxable and the other is not based on personal injury. other is now.

Compensation for unfair dismissal is taxed because it falls under the category of lost wages.

The tax rules are full of nuances and exceptions. Therefore, it is best to leave this area to a specialist local lawyer with a proven track record to minimize your tax liability and receive the maximum compensation you are owed.