Can You Get Taxed On Personal Injury Settlements?
In Maryland, a common question posed by recipients of personal injury settlements is, “Will this be subject to taxation?” Fortunately, the answer is generally “no.” Settlements that compensate for personal physical injuries or physical sickness are largely tax-exempt. This means that, in most instances, these settlements are kept free from the grip of taxation. However, it is important to remember that there are some exceptions to this rule, and not all components of a personal injury settlement may escape the tax net.
Compensation For Medical Costs, Emotional Distress or Trauma, and Pain and Suffering Are Not Taxable
The most common types of damages awarded in personal injury cases are medical costs, emotional trauma, and pain and suffering. In Maryland, if these damages are awarded in relation to physical injuries or sicknesses suffered by the injured party, then they will not be subject to taxation.
Medical Costs
Medical costs include any expenses incurred from doctors’ visits, hospital stays, medication costs, and other expenses directly related to the treatment of physical injuries or sicknesses. These costs are not taxable in Maryland.
Emotional Trauma
Emotional trauma covers damages for any psychological distress caused by the injury. This can include depression, anxiety, and post-traumatic stress disorder (PTSD). As long as these conditions are related to a physical injury or sickness sustained by the injured party, they will not be subject to taxation.
Pain and Suffering
Pain and suffering is a term used to describe damages awarded for the physical and emotional pain endured by an injured party. Similar to emotional trauma, as long as these damages are related to a physical injury or sickness, they will not be taxed in Maryland.
Confidentiality or Non-Disparagement Clauses
Often when you settle a personal injury case, the wrongdoer wants to keep the terms of the settlement confidential, and wants to prevent you from disparaging them related to the alleged wrongful conduct. Payments for these types of damages may be taxable. You should consult with a tax professional if these types provisions are included in your settlement.
Property Damage is Not Taxed (Typically)
Settlements for property damage, more commonly relating to automobile accidents, generally do not require you to pay taxes in Maryland. This category includes expenses for repairs, replacements, or any decline in the value of the property due to the injury-related incident. In most cases, the IRS considers these payments as restoring the individual to their original financial state before the incident, and hence, they are not typically considered taxable income. However, if the compensation for property damage exceeds the fair market value of the damaged property, this surplus might be taxable. As always, in legal matters, there may be exceptions, so consulting a tax advisor or personal injury attorney is highly recommended for your personal injury claim.
Lost Wages Are Taxable
Unlike the compensation for medical costs, emotional trauma, and pain and suffering, lost wages are subject to taxation in Maryland. Lost wages refer to the income that the injured party was unable to earn due to their physical injuries or sickness. These lost wages are considered as income by tax authorities and, therefore, are taxable.
This means that if a part of your personal injury settlement covers income that you would have earned if not for the injury, you will have to report these as part of your gross income for taxation purposes. Being aware of these tax implications is crucial to understanding the real value of your settlement and to avoid any potential tax surprises in the future from your personal injury case.
Punitive Damages Can Be Taxed
Unlike compensatory damages, punitive damages are typically awarded in personal injury cases to punish the defendant for egregious conduct and to deter others from similar behavior. It’s important to note that in Maryland, these punitive damages are considered taxable income.
This is because, unlike other damages that are intended to restore the victim to their pre-injury state, punitive damages are seen as a financial gain. Therefore, if your personal injury settlement includes punitive damages, be prepared to report it as part of your gross income when you file taxes. It’s advisable to consult with a tax professional or an attorney to understand the tax implications of your settlement agreement and personal injury claims.
Our Personal Injury Lawyers Can Help You
Our team of personal injury lawyers is here to help you navigate the legal complexities of your case. Drawing from our extensive experience and deep understanding of Maryland’s personal injury laws, we can guide you through every step of the claim process. We’ll work closely with you to gather evidence, negotiate with insurance companies, and advocate for the highest possible settlement. Moreover, we’re prepared to help you understand the tax implications of your settlement, ensuring you’re not blindsided by unexpected tax obligations. If you believe you have a personal injury case or have questions about your settlement, don’t hesitate to reach out to us. Contact us today for a free, no-obligation consultation.