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Tax Ramifications of Personal Injury Claims

The Anastopoulo Law Firm

Before we know it tax season will be upon us again. While many of us dread that time of year, with the mountains of paperwork, and the potential for owing money, others look forward to getting even a modest refund of state and federal taxes. Figuring out the tax codes can be a daunting process, and through the Internal Revenue Service has taken steps to streamline the process, calculating your yearly tax obligation is often confusing and time consuming. If you have received a settlement for a personal injury claim over the past year, you are likely wondering if you need to pay taxes on the amount of compensation you received. Understanding how the IRS handles personal injury settlements can ensure you stay on the right side of the law while hanging on to the compensation you received for your injuries and losses.

Types of Compensation

In order to understand your tax liability, it helps to understand the types of compensation or damages that can be awarded in a personal injury case. Under the South Carolina Code of Laws, Section 15-32-210 defines two distinct types of damages awarded in personal injury cases:

Economic damages include reimbursement for actual expenses such as:

  • Medical, hospital, and surgical expenses
  • Rehabilitative expenses and expenses for prescriptions and medical devices, such as wheelchairs
  • Lost wages and loss of earning capacity due to your injury
  • Property damages, including the cost of repairing or replacing property

Non-economic damages include compensation for non-material things such as:

  • Pain and suffering
  • The trauma of disfigurement
  • Emotional distress
  • Loss of quality of life
  • Inconvenience

In addition to the above, your claim may also include punitive damages, which is usually a large amount of money awarded and meant to punish the negligent or reckless actions of another that resulted in your injury.

Your Tax Liability

When calculating the amount of taxes you owe, you need to calculate your annual gross income, which includes profits you received from employment or a business, as well as any interest payments, bonuses, and money from other sources that you received throughout the year. To determine if you owe taxes on a personal injury settlement, you need to keep several things in mind:

  • If your personal injury claim stems from an actual physical injury or illness, you generally do not need to claim economic and noneconomic damages as income on your taxes.
  • If your personal injury claim stems from a non-physical injury, such as a claim involving job discrimination, you generally are required to claim the damages you receive as income for tax purposes.
  • If you receive punitive damages, this type of compensation has to be reported under income, and you would need to pay taxes on the total amount of punitive damages you received.

In addition to the above, if you claimed medical expenses from your injury as an exemption on a prior year's taxes, you would be required to report the compensation you received for those expenses as income, and pay taxes on that particular amount.

Reach Out to Us for a Consultation

If you or a loved one has been injured or hurt in an accident, contact the attorneys at Anastopoulo Law Firm. Our experienced South Carolina personal injury attorneys will fight to protect your best interests and can assist you in getting the personal injury settlement you deserve. We can guide you through the entire process, providing the effective and comprehensive legal service you need in these types of matters. Contact our legal team today!

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North Charleston, SC

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North Charleston, SC 29406
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Phone: (843) 202-4511

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Columbia, SC 29201
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