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Taxes and My Personal Injury Settlement

Will you be taxed for compensation you get from a personal injury lawsuit?
Well, there are many ways to look at this issue – and the best may be to consult with an accountant and lawyer – but this guide will give you a general breakdown of what to expect.

First, not all settlements will be taxable, but some can be. This depends on how the settlement is reached, and what language is used in the final documents. If you do not address why you are getting this compensation, for example, you may face some tax problems. It's smart to include why you are getting this compensation, but even then you should expect to pay some of your money to the government.

One common way the government takes money – whether it seems fair or not – is that of lost wages.
Think logically here: if you make $50,000 a year, and taxes take $8,000 a year, but can no longer work this job for some time, you get compensation. More to the point, if you worked, those wages would have been taxes; if you are compensated for lost wages, you will have to pay taxes on that, just like you really had the job. See how that works? You are paying what you would normally pay, and there is little way around that.

If you suffer severe injuries, and you get a huge medical bill, and this bill is covered with your compensation, that money is almost always not taxable. Also, if your car is damaged, and you are compensated for that, that money is not taxable. Money you get to cover injury and damages, to your body and to your property, is rarely if ever taxable. This makes sense, as this money is not going into your pocket like wages.

If you suffer mental injuries, you are now in a difficult position. By some rulings, you may have to pay taxes on compensation for psychological injuries. If you go through a manic depression, or cannot sleep, or go through some other mental illness, you might think the compensation should not be taxable. However, it can be, and often is. This depends on the language used in the settlement. And it also depends on the type of legal representation you get.

There are some differences between money you get from a settlement and compensation you get from a ruling. A judge may use the necessary language in the final ruling – where you get your compensation – on what this compensation is paying for. He or she may have an affect on how taxes are done. On the other hand, settlements can be different, and the language needs to be correct in order to solve the tax issue.

Yes, these things do get complicated. Should you always pay taxes? Is it right? We could be here for days, as this is an issue in many personal injury lawsuits. You should expect to pay some taxes on compensation, but usually the most important money will reach you, not the government.