There are generally considered two types of damages in a lawsuit: compensatory, and punitive. Compensatory damages are awarded in the case of loss or injury to person or property of the injured party. These are usually a specific, calculated amount based on actual damages due to the negligence of another party. Punitive damages are intended to punish the wrongdoer and set an example to prevent this type of reprehensible behavior. Punitive damages amounts will be significantly higher than compensatory but are harder to prove and will generally be disputed by the defendant.
In the event that you do agree to settle the case and are awarded a settlement amount by the defendant, you may be wondering, are lawsuit settlements taxable? The IRS has set forth very specific guidelines. If you receive a settlement for personal injuries or illness and did not itemize deductions for medical expenses related to the injury or illness in prior years, then the full amount of the settlement is not taxable and should not be reported on your tax return. However, if you itemized deductions for medical expenses in prior years, you have to include in income the portion of the settlement that was deducted in prior years, if itemizing resulted in a tax benefit. The same rule applies to a settlement for emotional distress or mental anguish, unless the proceeds you received were not due to a personal physical injury or illness.
If you received a settlement for lost wages, that is treated like regular income and is subject to income tax and must be reported under wages and income. For any settlement related to loss or damage of property that is less than the amount of the adjusted basis of your property need not be reported, and are not taxable, but the amount of the settlement should be reduced in the basis amount.
It is good to have information on the taxable status of settlements taxable to avoid running into any trouble with the IRS by not properly reporting the settlement amount.
Are Punitive Damages Taxable?
Exemplary damages and punitive damages definition are the same and used interchangeably. Punitive damages are awarded when it is deemed that compensatory damages is not enough to compensate the plaintiff, and more than compensating the aggrieved party, punitive damages are intended to punish the defendant for outrageous conduct that was negligent or intentional.
An example of punitive damages is when a company sells diet pills knowing that they cause illness, and the plaintiff takes them and becomes ill. In most cases, to be awarded punitive damages the court requires the injured party to prove intentional misconduct, through malicious, intentional or gross negligence. Negligence is the violation of a duty to act with reasonable care. Due to one party’s negligence, intentional or otherwise, another party was injured.
Another big example of punitive damages would be if a car company intentionally released a certain model car knowing that the airbags failed safety tests and would explode with shards of glass when deployed. If a plaintiff was severely injured due to this gross negligence, it is likely they will win a large amount in punitive damages as the car company should be punished for their conduct.
Punitive damages are taxable and should be reported as “other income” on your tax return.
Are Compensatory Damages Taxable?
Compensatory damages are by definition the same as actual damages and is the amount of money awarded to the plaintiff as compensation for damage to property, a personal injury or another type of loss due to the negligence or unlawful conduct of another party. For example, if you were in a car accident and your car was hit and totaled by another driver, and the accident was the other driver’s fault, you could receive compensation for the value of your vehicle at the time of the accident, and for any medical expenses related to the accident.
Types of compensatory damages include medical or hospital bills, rehabilitation due to an injury, property damage- replacement or repairs, lost wages due to the inability to work because of an injury, mental or emotional anguish and increased living expenses.
Compensatory damages awarded for a physical injury that is visible, are not subject to taxes by the IRS. However, compensatory damages for non-visible injuries such as emotional distress, defamation or loss of reputation are subject to taxes. But damages awarded for physical injury or sickness that led to emotional distress are not taxable.
When it comes to medical expenses incurred due to a personal injury caused by the negligence of another party, there are a few things to consider in order to calculate the amount you are owed. Special damages cover specific economical losses, such as emergency room bills, dental bills, physical therapy. You should keep a list of these out of pocket expenses and can include them even if the insurance covered the hospital bill, or if the hospital settled for a lower amount.
Another type of damages that is harder to calculate is general damages, which are non- economic costs and have no calculable monetary value. These injuries can include nerve damage, eye damage, or other physical or emotional pain and suffering due to the accident. Although harder to prove, if the plaintiff can prove that the defendant’s actions directly led to loss or injury, they may receive compensatory damages.
Compensatory damages may be awarded in the event of a car accident where the other party was at fault. In this case, the amount awarded will be calculated based on the value of the auto or vehicle, to replace or repair it, or the cost of damages to any property that occurred. Many property or auto damage claims end up being paid for by car insurance companies.
If a person suffered loss of wages or loss of earnings due to a physical or personal injury caused by another party, calculate your daily wages by the number of days of missing work. To calculate your lost wages, determine if you were paid by the hour or a salary. Calculate the total number of hours or days missed due to an injury and be aware that you may be entitled to claim future days of work that you will likely be missing due to the injury.
Pain and Suffering Damages
Pain and suffering damages are awarded to the plaintiff for any suffering that they had to go through as a result of the injury, that they may otherwise not have had to experience if they hadn’t been injured by the negligent party.
These include emotional distress, emotional trauma, mental anguish, and loss of consortium. In order to prove pain and suffering damages, you may use the testimony of a specialist or expert that can testify to the effects of pain and suffering. You can use prescriptions to show the medications you need to take. You can give your own oral or written account the painful experience has had on you or submit oral testimony from family and friends.
Although pain and suffering damages are harder to calculate because they are damages that do not have a specific monetary value, they are oftentimes awarded to the plaintiff if there is enough evidence to prove that pain and suffering has occurred due to the accident. The amount awarded is then determined by the court.
How To Avoid Paying Taxes On A Lawsuit Settlement
There are a few ways to avoid paying taxes on a lawsuit settlement. Structured settlements are court settlements where the lawsuit damages are paid out by the defendant in an agreed upon schedule over a period of time. Since the lawsuit money is not received all at once, the money is not taxable.
Alternatively, the settlement should be structured to first cover the non-taxable forms of compensation and only then taxable items.
Can’t Pay Your Accident Bills?
Lawsuit loans are a cash advance given by a lawsuit funding company where you give over your rights to the settlement amount, either all or a portion of it, in exchange for money up front. This is a great option if you are unable to cover living expenses are other bills due to court fees or loss of income. Pre-settlement funding is the calculated amount of money that you would be awarded by the court in the event that you win your personal injury lawsuit. In the event that you lose the lawsuit, you do not have to repay the loan. The loan is meant to help you during a time when you may be pressed for finances, and the risk is placed on the loan company that calculates your chances of winning the lawsuit based on your documentation.
If you are waiting for your accident lawsuit to settle but are struggling to pay your bills, Delta Legal Funding can help, by sending $500-$100,000 within 24 hours. The funds can be used for household expenses, bills and your family’s needs. When you win your case, you pay us back. If you don’t win, you don’t pay us back. Don’t suffer now while waiting for your settlement to be decided. Call us now. We can help.