No, you do not have to pay taxes on a settlement reward from a lawsuit. The general rule for taxability on settlements received can be found in Internal Revenue Code (IRC) Section 61. This section states all income is taxable unless it is listed as an exemption. IRC Section 104 provides a taxable exclusion with respect to lawsuits, settlements, and rewards.
Do I Have to Pay Taxes for Past and Future Medical Expenses for a Louisville Motorcycle Accident Settlement?
Under 26 U.S. Code 104 (a)(2), the compensation you receive for your medical expenses for your physical injuries does not count as your gross income and is not taxable by the IRS or the State of California. Damages for your past and future medical expenses are not considered taxable income as they are considered to be monetary reimbursements for the money you were forced to spend to receive treatment for your injuries.
However, when filing your taxes, if you claimed itemized deductions for some of your medical expenses while your lawsuit was pending, you will have to include those deduction amounts and report them to the IRS. This rule is covered in the subsection of 26 U.S. Code 104(a), which states that any medical expenses you claimed as itemized deductions during the year you received your settlement or reward cannot be later exempt from your gross income.
So, if you only received the standardized deduction and did not itemize your medical expenses, then none of your medical expenses will be taxable.
Exceptions to Tax-Free Settlements
If you’re rewarded punitive damages, that portion of your recovery can be taxed. Punitive damages are rewarded to accident victims who were harmed intentionally or due to an extreme case of recklessness. An example of this in a motorcycle accident would be if the motorcyclist was intentionally run off the road, or hit by a drunk driver.
Another exception to receiving a tax-free settlement is if you receive interest on your award. Interest can accrue while a settlement goes unpaid. Generally, an unpaid principal balance collects 10% or 7% if the debtor owes $200,000 or more or if they’re a government entity, but will not exceed 15%, according to the General Assembly of the Common Wealth of Kentucky.
Are Settlements and Judgements Two Different Rewards?
No, out-of-court settlements and judgments handed down by a judge or jury are considered the same thing and are subject to the same tax rules and regulations by the IRS. A legal settlement is an agreement between two parties to resolve a legal claim. Therefore, it is not taxable. A settlement often includes:
- The amount of compensation and any payment plan involved
- A full liability release in which the plaintiff agrees to drop any claims against the defendant
- A confidentiality clause that prohibits either side from talking about the case in public
A judgment, on the other hand, is known as a verdict made by a judge or a jury in a civil court. Both sides are required to present their evidence and arguments in court. Once a judgment is made, the liable party will have a set amount of time to pay the plaintiff. If the payment is not made, then the plaintiff can file a judgment lien on the liable party’s property and assets until the debt is paid.
Contact a Louisville Motorcycle Accident Lawyer
If you’ve been hurt in a motorcycle accident, you need an attorney who will protect your rights and help you receive the full amount of compensation for your injury settlement. At Kaufman & Stigger, our Louisville motorcycle accident lawyers are passionate about giving motorcycle accident victims the support they need to get their lives back on track. Put the tiger on your side and call Kaufman & Stigger today for a free consultation.