Suffering a serious injury is always painful and distressing, especially if it causes disability and leaves you facing an uncertain future. It’s especially traumatic when the injury was preventable if only someone else had taken reasonable care. A personal injury claim against the responsible party can take time to resolve before you receive your settlement or court award for damages such as medical expenses, lost earnings, and compensation for pain and suffering. Many injury victims face considerable financial consequences from their injury before they finally have their compensation in hand. After deducting their attorney’s fees, you may worry that you will lose a significant percentage to taxes. Is a personal injury settlement taxed in California?
Understanding the Tax Obligation for Portions of a Personal Injury Settlement In California
Before you can determine whether you owe taxes for your personal injury settlement, it’s crucial to understand that portions of the total amount you recover are divided into categories that include economic and non-economic compensation, and, less commonly, punitive damages. Whether or not you face taxes on a portion of your compensation depends on the category and other considerations.
A substantial portion of most California personal injury settlements compensates the injury victim, their medical insurance company, or the hospital, for their medical bills and out-of-pocket injury-related expenses. This portion of economic damages is not taxable.
Another category of economic compensation in personal injury claims is lost income. This portion of a settlement is subject to income tax because it replaces the income that the injury victim would otherwise have earned and paid taxes on.
Compensation for pain and suffering is not taxable in California, even though this category of a settlement is often a substantial portion of the total settlement amount.
In most cases, any compensation for emotional damages like PTSD, loss of consortium, or loss of enjoyment of life is not taxable if it stems directly from the injury; however, if a claimant recovers compensation for emotional damages but suffered no physical injury, the amount is taxable.
Are There Other Tax Considerations for a Personal Injury Settlement In California?
Recovering a settlement takes time, even in the most straightforward cases, but some cases take longer to resolve than others. If the amount of your settlement stays in an account while your attorney, the insurance company, and the court work through the negotiation process, it often gains interest. The interest on the settlement amount is considered income and therefore it is taxable.
If a settlement overvalues a specific portion of your damages, you could be subject to taxes on the difference. For instance, if a settlement for your Van Nuys car accident awards you $20,000 for assistive mobility equipment but you only paid $16,000, you may owe taxes on the $4,000 difference.
Finally, punitive damages are sometimes awarded to an injury victim if they were injured due to egregiously reckless or intentionally wrongful actions. This amount is not compensation for losses, but serves as a penalty to the wrongdoer; therefore, it is subject to taxation.
If you have questions about how taxes impact your specific settlement or court award for personal injury damages, your Van Nuys injury attorney can help.
