Do I Have To Pay Taxes On My Settled Personal Injury Case?

If you have been in an auto accident that was not your fault that resulted in medical problems such as fractures, in all likelihood you need to miss work and deal with significant pain and associated suffering. You needed to have Dr. visits, x-rays taken, physical therapy, mental counseling and probable nightmares, with all of it ending up being a very stressful time in your existence.

Eventually your personal injury case reaches a settlement and all of your damages could reduce down to a financial amount. Are you then liable to pay taxes on that settlement money? It actually depends on whether or not the monies received in settlement are appropriated to the injuries sustained or for the economic benefit loss.

The premise is that basically if the monies are being received for the injury then it is not taxable. if however the money received is for loss of economic benefit than it is included in gross income and subject to taxation. If you are out of work and lost wages and part of your injury settlement replaces those amounts, you would have to pay taxes on that because you would’ve been otherwise working and paying taxes anyway. There has been some precedents with case law as to this, put it is not always clearly defined. This article also is not being written by an attorney so this does not constitute definitive legal advice!

The IRS has a tax code dealing with physical personal injury payments and how they are excluded from gross income. That section is text 2104. It is not extremely clear to find as directors not give specific guidance on the terms “physical injuries or physical sickness”. If the settlement compensation is being received for “physical sickness or personal injuries” than that amount is supposed to be excluded from a person’s gross income amount.

An IRS case in the past known as LTR 200041022 involved in IRS ruling about a woman who got a settlement from her employer as it related to unwanted physical contact. Since the settlement that the woman received was not based on actual physical injuries and there was no “observable bodily harm”, the IRS ruled that the settlement monies had to be included in her gross income.

There was also a United States Supreme Court case section 104, Schleier v. Commissioner. there was a two-step mandate that was adopted by the court with the cause of action need to be a tort type action with the monies received being on account of personal physical injury or sickness.

Since it is not clear cut, people should speak with a competent tax attorney to clarify what to expect with regards to gross income inclusions versus exclusions. Sometimes settlements end up in the millions, and if not calculated correctly the IRS may come knocking.

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