Are personal injury awards taxable in california?

Understanding the tax laws around personal injury settlements in California

Personal injury settlements often come with a lot of emotional suffering in addition to the physical injuries endured, and winning a personal injury claim isn’t always the end of the case. There are matters like receiving your settlement check and paying your lawyer’s contingency fees that will still need to be resolved. You may also wonder if your settlement award will be taxable. The answer depends on your situation.

The Internal Revenue Service (IRS) and the state of California may impose taxes on some (or all) of your personal injury settlements. How much tax you’ll have to pay depends on what types of damages you receive. Let's look at some of the taxable and non-taxable damages in California personal injury settlements.

Are personal injury lawsuit damages taxable in California?

A personal injury settlement is a form of income, so the kind of taxation the IRS imposes is an income tax. In the United States, people who earn a certain income level are required to pay federal income tax to the IRS. Additionally, California requires most wage earners to pay a separate state income tax as well.

There are different federal and state tax codes, but most damages in a personal injury case that are taxable by the IRS are also taxable by the state of California. There are various damages involved in a personal injury settlement, including medical bills, lost wages, emotional distress and property damage, so it’s vital to understand how to report these awards when you file your taxes. According to the IRS taxation guideline on settlements, the following damages are taxable.

Medical expenses

The good news about a personal injury settlement is that you likely won’t have to pay any taxes on the compensation you receive to cover your medical expenses. This compensation is intended to reimburse you for the money you already spent or will need to spend on medical-related costs. Your entire medical compensation should be tax-free unless you claimed your medical costs as a tax deduction in a prior tax year, in which case taxes may apply.

Lost wages

Most plaintiffs seek lost wage compensation after an accident to cover their temporary or permanent absence from work. The IRS taxes this compensation because it is intended to replace the income that you would have been taxed on if you had been able to work.

The amount of tax you have to pay depends on the amount you normally pay for your business or personal income taxes. Lost wage damages are typically the largest amount of taxable damages in a personal injury case, so they will need to be reported to both the IRS and the state of California.

Pain and suffering

Many personal injury awards also include pain and suffering compensation. Mental anguish and emotional distress are not taxable, but they can be complicated. Here's a breakdown:

• • Emotional suffering brought about by physical injury or illness is non-taxable. You will not be taxed on these damages if your emotional suffering resulted from the physical harm that you sustained.

• If you were awarded pain and suffering damages for something other than a direct physical injury (such as being a witness to someone else's injury), these damages might be taxable.

Most personal injury lawsuits involve physical illnesses or injuries, and plaintiffs with emotional and physical pain and suffering damages are not normally taxed.

Property damages

You might seek compensation for property damages if you were involved in an accident such as a car accident. Property damages are not taxable unless you receive more than the adjusted basis (value) of your property. In that case, you will be taxed only on the excess amount.

Punitive damages

In rare instances, California gives victims the right to ask for punitive damages, which are intended to punish the defendants in certain extreme cases. Punitive damages serve as an additional award and are taxed as "other income." This compensation, as well as any interest you receive, is always taxable.

What to know if you think you’re entitled to compensation after a personal injury

Most personal injury settlements and awards are non-taxable. This means that in most cases, your settlement money won’t be taxed in the same way as your income unless you qualify for an exception. The only way to know if your personal injury settlement will be taxed is to consult a tax expert, so it’s wise to have your taxes done by a professional to make sure you follow all the rules and avoid tax penalties later.

If you live in California or Texas and you’ve been injured in an accident, contact the experienced personal injury lawyers at MVP Accident Attorneys. Our team of attorneys specialize in personal injury law, so you can rest assured that we can help you figure out the right course of action for your unique case.

We have extensive experience dealing with insurance companies and getting our clients the compensation they deserve. Contact us for your free, no-obligation consultation today.