Getting hurt because of someone’s negligence forces you into the bureaucratic worlds of insurance and law. You can add the Internal Revenue Service to that list because the personal injury settlement that you receive may have federal tax consequences. A Nevada injury lawyer or tax preparer can help you plan for impending tax bills. You may owe taxes on portions of your settlement money.
Settlement Allocations Affect Taxable Status
The total settlement is the sum of all amounts of compensation allocated for different forms of damages. In a typical scenario, part of the money will be for healthcare bills and lost income. Some settlements include compensation for property damage or emotional distress. On rare occasions, people receive an award of punitive damages.
Each allocation of money was meant to compensate you for matters for tax purposes. Some damages are nontaxable, and some are taxable on your federal return. Nevada has no state income tax, so no part of your personal injury settlement obligates you to pay a state tax.
Money paid to compensate your healthcare providers is not taxable unless you deducted your medical expenses on your tax return while awaiting your settlement. You may have done this as an itemized deduction to reduce your taxes for one or more years while your Nevada injury lawyer managed settlement negotiations.
Injury attorneys in Nevada pursue compensation for accident victims who lost income because they were unable to work or run a business. This applies to wages, salaries, or business income.
Any compensation in your settlement attributed to your lost income is taxable. In the view of the IRS, the government would have collected income taxes on these sums if you had not been hurt and kept from working. As a result, when the settlement arrives, the portion representing lost income must be reported as current income.
A personal injury settlement may contain money for property damaged in the accident, such as a vehicle or an expensive laptop. This reimbursement for your loss is not taxable. However, if you receive compensation in excess of the decreased property value, then it could be taxed as capital gains.
Months and sometimes years can pass before an injury victim receives a settlement. For this reason, a settlement could include interest payments on what you were owed but had to wait to receive.
Interest income is taxable income, and you will have to report the amount of interest paid when you file.
When appropriate, Nevada personal injury attorneys pursue compensation for turmoil and trauma that victims experience due to their injuries. Sums received for emotional distress are not taxable if your distress is directly connected to the physical harm inflicted by your accident. Emotional distress could present as worries about future disability or frustration because you can’t take care of your children.
Accidents caused by extreme negligence or apparent disregard for the consequences of actions may qualify for punitive damages. In cases like that, the responsible party must pay you extra as a punishment on top of paying your other expenses.
As a result, punitive damages that you collect become taxable income for you. The reasoning used by the IRS to tax this portion of your settlement is that the money does not reimburse you for a loss. The payment is forced as a means of punishing another party, and you happen to be the beneficiary of that.
Tax Planning If You Expect a Personal Injury Settlement
Nevada personal injury attorneys can document expenses carefully to ensure they are clearly attributed to accident injuries. This is especially important for emotional distress because its tax-free status depends on being caused by the accident.
In the early weeks of filing insurance claims for victims, injury attorneys in Nevada can explain what portions of settlements may or may not be taxable. You may also consult your tax preparer for an opinion about whether you should deduct medical expenses when you file. The choice to deduct medical expenses creates a tax obligation if you collect the settlement later, but you may really want the deduction in the meantime while you’re waiting for compensation.
As more time passes, your Nevada injury lawyer should get a better idea of how much you will collect and when. If you expect to receive a sizable settlement, you may need to plan for paying some federal income taxes, and you might need to send in estimated tax payments to avoid penalties. Most often, the payment for your lost income will be the source of your largest tax burden upon receiving a settlement.
Upon receiving a settlement, the entity that compensated you should issue a W-2 form at the end of the year. The W-2 will indicate taxable portions of the settlement.
Learn More at Lach Injury Law
If you are the victim of negligence, taxes are another unpleasant issue to deal with as you try to recover physically and financially.
At Lach Injury Law, you can depend on our guidance concerning every detail of your injury case and settlement. To find out what your accident damages might be worth and if you could owe taxes, call our office today.
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