Americans that fall under the most common income bracket paid an average income tax of $4,688 in 2018.
Taxes can be an unexpected financial burden at the end of the year. But we’re taxed on more than just income. Indeed, the IRS takes their share of any chunk of money we have coming in – and that includes your settlement money.
If you’ve received settlement money, you might be wondering “is settlement money taxable?”. The answer is that not all settlements are treated equally in the eyes of the IRS, and you should know the difference before filing next year’s return.
Keep reading to find out whether you’ll be paying taxes on your compensation.
Is Settlement Money Taxable?
The IRS typically views settlement money as income. Anything considered income is also considered taxable.
And while that’s the typical rule of the IRS, there are of course exceptions. Whether you fall under those exceptions has to do with the particulars of the lawsuit in question.
What Settlement Money Isn’t Taxable?
To be exempt from taxation, your settlement money has to be the result of a personal injury case. Specifically, your personal injury would have to involve a physical injury and “observable bodily harm.” If your injuries fall under this category, then your settlement money is tax-free.
The same can be said for emotional distress that you experience as a direct result of a physical injury. While emotional distress in and of itself is taxable, if it’s part of your physical injury, you won’t pay taxes.
What Is Taxable Settlement Money?
Your settlement money is taxable if it falls under any of the following categories:
- Punitive damages
- Payments for lost wages
- Payment for lost profits
- Interest on monetary awards
- Damage in Civil Rights Act cases
- Damages in copyright or patent cases
- Damages for pension rights cases
When calculating how much you have to pay in taxes on your settlement, be sure that you don’t subtract attorney fees from your settlement. You pay taxes on the entire settlement amount, regardless of what you paid in attorney fees.
Make the Most From Your Settlement
It’s all too common that individuals involved in personal injury litigation are financially strained while they wait for their settlement money. They may have problems paying medical bills and keeping up with the expenses of living while they wait for their settlement money to come through.
Pre-settlement financing can help families in these situations. All it takes is filling out a 3-minute online application with a trusted financier like Florida Settlement Funding. You’ll know whether you’re approved within 24 hours and you’ll have access to funds shortly thereafter.
Although this doesn’t change whether or not you’ll be taxed, it does give you access to that money when you need it.
More Legal Know-How
So, is settlement money taxable? If you have an observable physical injury or emotional distress related to that injury, then you likely won’t have to pay tax on your settlement. But if your case falls outside of those guidelines, you’re likely going to be taxed on your settlement money.
The law can be confusing and complicated at times. If you need someone to break it down for you, check back with us regularly for more legal know-how.