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When it comes to legal settlements, the average person has plenty of questions. For instance, the taxation of various types of settlements is something that most don’t think about or fully understand until they are on the receiving end of such a settlement. This is because taxes are very complex and people don’t even think to consider the tax implications of a settlement. With that in mind, here is some information with regard to injury settlements and taxation everyone should know.

About injury settlements and taxation

If you’re in a position to receive a settlement, you might ask are injury settlements taxable? There are many aspects of injury-related cases and the settlements and a key piece to understanding when working through a settlement is whether these funds are taxable.

Are personal injury settlements taxable?

In short, the personal injury awards that are awarded for pain and suffering are not taxable. However, if your case involves things such as lost wages or punitive damages, the funds that you receive for these items are taxable. This is largely due to the fact that the latter can be considered income, which can make these damages eligible for taxation.

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In general, personal injury settlements are not taxable. This is due to the fact that under federal law, personal injury claims are not taxable. In particular, federal tax law excludes the ability to count money received from personal injury settlements or sickness from being claimed as income. So, when asking are personal injury claims taxable? Be advised that neither the federal government nor the state can tax money that you may win in these settlements.

Receiving your personal injury settlement

The length of time it takes to receive your personal injury settlement depends on the overall length of the case. However, once a signed settlement and release have been completed by all parties, in most cases, the funds are paid within 30 days. Due to processing, it is typical for these settlements to take up to six weeks to be sent. However, this only applies to cases in which the settlement is being paid by the insurance company. Those who are self-insured, such as a state or local government agency, could take up to 6 months to receive funds once the case has been settled. In extreme cases, it may take even longer, but these cases are rare.

Taxable portions

How much tax do you pay on settlement money? For the portions of settlements that are taxable, any money that is taxed is based on ordinary income at the prevailing tax percentage of the individual on their annual return. Nevertheless, if you receive a settlement that is a result of injury or sickness, and did not take an itemized deduction for medical expenses in relation to that injury, the total amount of your settlement should be non-taxable.

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Itemized settlements and taxation 

As mentioned, some parts of your settlement may be taxable, while others are not. If you are not sure which parts of your settlement are taxable, you should be sure to ask your attorney or a financial professional. Also, you should make sure that you understand which parts of your settlement will be taxable before you agree to the settlement amount. While many people assume that taxes are minuscule, it’s possible for a sizable amount of your settlement to be taken in taxes. In those instances, you should be requesting more than just the amount you feel you are owed, to account for this discrepancy.

Takeaways

  • Personal injury claims that are awarded as a result of injury or illness are generally not taxable.
  • Awards that include lost wages and punitive damages are typically taxable.
  • Be sure that you understand which parts of your settlements are taxable before agreeing to the settlement amount.

Overall, receiving a settlement can be more complex than it seems. Given that it often takes weeks, months, or occasionally, years before the funds are received, many turn to settlement loans as a way to get their money immediately. While a settlement loan can be convenient, it can also be highly costly. Before you settle for lawsuit loans or a loan for settlement, be sure to contact Legal Bay to consult with an attorney you can trust.

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