Of course, the most desired outcome from a personal injury case (whether auto, trucking, or otherwise) is receiving compensation that will help you recover from your injuries and return to some sort of normalcy as soon as possible.
While that’s the end goal, that money may not come free. It’s essential to understand how any money you might receive could impact your individual income tax situation for the tax year you receive the settlement check (or across multiple years if the settlement is paid in pieces).
In most cases, the income you receive from a settlement for personal injury is not taxable by federal or state agencies. Federal tax law explicitly excludes damages received from personal physical injuries from gross income.
Personal Injury Settlement Exceptions to Consider
The most important exception is punitive damages, or monies issued on top of the original settlement amount in response to something intentional or negligent by the guilty party. This income is taxable and is typically separated in the verdict as proof to the IRS of the separation of damages.
Many states have passed laws capping punitive damages, but Arizona is not one of them. Instead, Arizona case law has precedent in place to limit excessive or arbitrary punitive damage awards in most cases.
Lastly, any interest paid on a judgment is considered taxable. If a case has been pending for a considerable amount of time, many courts will add interest relative to the amount of time it has taken for the case to resolve.
If the award is for emotional injury only, with no physical injury, then the settlement award is taxable. The winning party would have to prove physical injury to avoid taxation on the settlement award.
If you’re beginning the process of a personal injury case, it’s important to look at the broader picture and understand any tax liability you could incur. In some situations, a quicker resolution may mean less tax burden overall, while a longer proceeding could mean something else entirely.
The specific tenets of a personal injury settlement are complex and reason enough to seek the guidance of a qualified Arizona personal injury attorney. Call the team at Rabb & Rabb, PLLC today at (520) 888-6740 to learn more and schedule your free consultation.