Lawsuit Taxes

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 What Is Personal Injury Law?

In a personal injury claim, an injured party, known as a plaintiff, claims that they have sustained an injury because of an act or failure to act by another party, known as a defendant. For the plaintiff’s injuries, a court may award the plaintiff money damages, which will be further discussed below.

In some cases, the circumstances which form the basis of a personal injury claim may also form the basis for criminal charges against the defendant. For example, a defendant may face a civil lawsuit for civil assault, as well as a criminal case for assault and battery.

Personal injuries may result in damage to a plaintiff’s emotional health, physical health, or both. Mental health injuries can include emotional pain and anguish sustained by an accident, such as developing PTSD from the incident.

Physical injuries can include injuries to organs, limbs, or other parts of an individual’s body. Importantly, injuries sustained by a plaintiff do not need to manifest themselves instantly, as injuries may develop over time.

There are several different types of incidents which may form the basis of a personal injury claim, including but not limited to:

As can be seen above a personal injury can clearly occur intentionally, such as when the defendant deliberately injures a victim, or intends to commit an act that results in injury to another person. Additionally, a personal injury may also occur unintentionally. Typically, an unintentional injury is the result of someone’s negligence.

In negligence cases the plaintiff may file a lawsuit based on the defendant’s negligent behavior. Automobile accidents, slip and fall accidents, and injuries sustained from medical malpractice, are all considered to be common personal injury negligence cases.

What Are Compensatory Damages In A Personal Injury Claim?

Once again, personal injury claims are legal actions in which a person has suffered physical, mental, and/or emotional injuries, and/or property damages. If the injured party files a claim or lawsuit against the party that injured them, the plaintiff will most likely be requesting some form of financial compensation from that responsible party for causing the accident.

This requested financial compensation is also known as compensatory damages, because the damages are compensating the recipient for the injuries that they suffered as a result of the wrongdoer’s actions or inactions.

Compensatory damages are generally awarded for the purpose of restoring the injured party to the position that they were in before their injury or loss occurred. Generally speaking, there are two main types of compensatory damage awards. The first is special damages, which are damages intended to restore the injured party to the position they were in before the harm or injury occurred.

Special damages most commonly include damages that can be calculated, such as:

  • Medical expenses, such as medical bills;
  • Property damages;
  • Loss of wages or earnings; and/or
  • Other quantifiable losses, such as future medical bills.

Alternatively, general damages may be awarded to the plaintiff for losses that are not easily determined through monetary calculations. These can include losses associated with the plaintiff’s:

Importantly, state laws may vary in terms of compensatory damages. For example, some states place limits on compensatory damages, especially general damages. Compensatory damages in a personal injury lawsuit are generally paid by the party that caused the damage, but they may also be paid out by their insurance provider.

In addition to compensatory damages, the plaintiff may also be able receive other damages, such as exemplary damages, which are known as punitive damages. Damages for a personal injury claim can be anywhere between $1 to millions of dollars.

Are Lawsuit Damage Awards Taxable?

If you have received a settlement or damage award as a result of a civil lawsuit, you will need to understand how you may be taxed on the awarded sum. Whether or not you may be taxed on your damages award depends on the type of damages you receive, as well as the nature of the lawsuit itself. According to tax laws, the only damages that can be awarded without paying taxes are those that compensate an individual for their physical injuries or sickness.

Typically, the proceeds a person receives from a personal injury claim are not taxable under either federal or state law, regardless of when and where the case was filed. It also does not matter whether or not the case went to trial.

What Kinds of Damages Are Not Taxable?

As noted above, the only damages that are tax-free are compensatory damages that compensate an individual for their physical injury or physical illness. However, to the extent that the damages award compensates an individual for their medical expenses that they used as an income tax deduction in a previous year, that amount will be taxable.

Additionally, any damages an individual receives that compensates them for general damages, such as emotional distress that directly resulted from their physical illness or injury, are also non-taxable.

What Types of Lawsuit Damages Are Taxable?

There are some exceptions to the general rule that damages that compensate an individual for anything other than physical injury and illness are generally taxable. Examples of taxable items resulting from a lawsuit include:

  • Lost Wages: Compensation for lost wages arising out of an employment discrimination lawsuit. This is because this money would have been taxed had the injured party received them as a paycheck. As such, damages attributable to loss of income or loss of income earning capacity are subject to employment taxes;
  • Punitive Damages: Punitive damages, even if the punitive damages resulted from an award for physical illness or injury, are taxable;
  • Lost Profits: Similar to lost wages, profits that were lost would have also been originally taxable, as such they remain taxable;
  • Interest: Any interest payments received on a settlement or damages award are taxable;
  • Breach of Contract Damages;
  • Intellectual Property Damages: Damages for patents or copyright infringement cases typically involve a damage claim for lost profits, and as such are taxable; and/or
  • Damages Related to Interference with Business Operations: Damages for interference with business operations typically include a claim for lost profits, and as such are taxable.

Can a Damage Award Place Me in a Higher Tax Bracket?

In short, yes. Any damages award that an individual receives is added to their total taxable income for that year. This means that the individual will pay higher taxes if their award is large enough to place them in a higher tax bracket. In order to avoid being placed in a higher tax bracket, individuals typically have the option of receiving their payments over time.

Is an Award for Attorney’s Fees Taxed?

In short, yes. Plaintiffs that receive a damages award are taxed on the entire amount of the award, less non-taxable compensatory damages. The taxable damages includes any portion they will use to pay an attorney’s fees. Attorneys who represent plaintiffs in personal injury cases or civil lawsuits are usually paid on a contingency fee basis. This means that the attorney gets paid only if the client wins the case.

The contingent fee is then deducted from the award and given to the attorney as a payment for representation. Importantly, plaintiffs must pay taxes on the entire award they receive, including the amount that was taken out and paid to their attorney. Additionally, if the defendant is ordered by the court to pay the attorney fees, that amount would also be included as taxable income.

Do I Need an Attorney for Help with Lawsuit Taxes?

If you have received a settlement or award of damages as a result of a civil lawsuit, it may be in your best interest to consult with an experienced tax attorney.

An experienced attorney will be able to advise you on the best way to structure the payment of your damages award. Additionally, they may be able to assist you in lessening the amount of taxes that you owe on your damages award.

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