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Tax Law's Impact on Personal Injury

Posted by Tony Mankus | Jul 26, 2023 | 0 Comments

Below is a guest article from the law firm of Cohen & Cohen

You may think of law as a series of distinct disciplines, each operating in its sphere much like planets in a cosmos. Yet, just as celestial bodies influence one another via gravitational forces, so do legal fields intersect and interact. A surprising interplay exists between tax law and personal injury law, two seemingly disparate areas.

When injured due to another party's negligence, your primary focus is to recover the compensation you need for medical bills, lost wages, and your pain and suffering. But an underappreciated aspect is the potential tax consequences of your personal injury settlement. Tax law's relevance to your case can be a deciding factor in the final compensation you pocket. Our friends at Cohen & Cohen delve deeper into these complexities in the following sections.


Personal Injury Settlements

Let's shed some light on the workings of personal injury settlements. If you have suffered because of someone else's careless actions, you have the right to seek redress. A personal injury lawyer is the trusted ally to help you maneuver this maze and stand up for your rights.

If your claim reaches a successful outcome, your compensation may cover different types of damages—medical expenses, lost income, and 'pain and suffering.' Though this seems straightforward, the rules get less clear when tax laws come into play. Not all forms of personal injury settlement compensation are viewed equally under U.S. tax codes.

Physical injuries or sickness compensations are typically tax-exempt by the Internal Revenue Service (IRS). This means the settlement you receive for physical harm will most likely not be taxed. However, this doesn't hold for every component of a personal injury settlement.

Damages for emotional distress not related to physical injury or sickness can be taxed. Also, lost wages, considered a stand-in for regular income, can be taxed.


Leveraging Tax Law Knowledge

Understanding tax law intricacies can be a game-changer when it comes to maximizing your net compensation from a personal injury settlement. Neglecting or misinterpreting tax obligations can result in hefty tax bills in the future.

Tax implications can shape the negotiation process and the structure of the settlement. A savvy negotiator might push for a larger settlement portion to be ascribed to physical injuries (non-taxable), rather than lost wages (taxable). This instance shows how tax law understanding can influence the outcome of a personal injury case.

Furthermore, knowledge of tax law is crucial even after the settlement. It's necessary for correct tax reporting to prevent potential disagreements with the IRS down the line. Victims must know which settlement components need to be included in their tax returns.

Even though tax law and personal injury law might appear as distinct orbits in the legal universe, their interaction is not rare. A good grip on both can optimize personal injury case outcomes and ensure victims secure the compensation they truly deserve, devoid of unnecessary tax burdens.

While this article provides an overview, each case has its unique complexities. So, it's crucial to consult professionals who have expertise in both tax and personal injury law. They can guide you through this intricate crossroads and help you extract the most from your settlement, taking into account all legal and tax considerations.

About the Author

Tony Mankus

Tony worked for the IRS from 1971 through 1986 out of various offices, including Newark, New Jersey, Office of International Operations in Washington, D.C., San Juan Puerto Rico, and Chicago, Illinois. He worked in what was then known as the Collection Division and performed the duties of a Reven...


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