If you get hurt by someone else’s negligence, like in a car accident, you can file a personal injury lawsuit and recover financial compensation for your losses. In Missouri, most of that financial compensation is not taxable at the state or federal level. However, some of it is.
The General Rule: Personal Injury Settlements or Awards are Not Taxed
According to Section 61 of the Internal Revenue Code (IRC), the federal tax statute, all income is taxable unless it is excluded by the Code. However, Section 104(a)(2) of the IRC excludes “damages received on account of personal physical injuries” in a lawsuit.
The rule is fairly straightforward and intuitive: Income is taxable. Money from a personal injury case is not income because it was not the fruits of your labor and was instead meant to pay you back for your losses.
The Exceptions: Some Types of Compensation Can Be Taxed
As with every rule, there are exceptions. The following four types of compensation from a personal injury case are subject to state and federal taxation.
Note that these exceptions are for personal injury cases. Employment-related cases have different exceptions.
Previously Deducted Medical Expenses
A key component of your settlement will cover your medical expenses. This is generally not taxable. However, if you already deducted your medical expenses from your tax return, the amount that you deducted is taxable. If it was not taxable, you would have essentially deducted it twice.
The easiest exception to understand is the one for punitive damages. These are extra payments imposed on a personal injury defendant for egregious conduct. Because they are not “received on account of” your injuries, and were instead received because the defendant acted especially poorly, they are taxable.
This exception, however, has its own exception: Punitive damages are not taxed if they were awarded in a wrongful death case where only punitive damages are available under state law (IRC Section 104(c)).
In personal injury cases, punitive damage awards are extremely rare.
Emotional Distress from Non-Physical Injuries
Compensation for your emotional distress or mental anguish is not taxable if it relates to a physical injury. They are taxable if they relate to a non-physical injury, like reputational harm or if your claim is solely based on the infliction of emotional distress, such as when you witnessed an accident but were not physically hurt by it.
Personal injury cases take long enough to resolve that interest can accrue on what you are owed. The amount that you stand to receive in interest is taxable.
What About Lost Wages?
According to IRS Revenue Ruling 85-97, 1985-2 C.B. 50, in personal injury cases your lost wages and reduced earning capacity are not taxable. This is different from employment-related claims, like wrongful termination, where these forms of compensation are taxed.
Car Accident Lawyers at the Smith Law Office Serve St. Joseph, Missouri
The personal injury and car accident attorneys at the Smith Law Office help accident victims recover the compensation they need, all while minimizing their tax liability on the settlement or verdict.
Contact them online or call their law office at (816) 875-9373 for legal representation and advice in St. Joseph, Kansas City, Springfield, or the rest of western Missouri.