When a personal injury claim is successful, the award is usually considered compensatory, meaning that it is meant to replace that which has been lost. This may be as reimbursement for actual expenses (medical bills, rehabilitation, doctor’s fees, etc.), damage to property, and loss of income (lost days of work due to temporary disability, incapacity to work due to physical disability, or death). These are economic damages. Most states also allow a claimant to sue for non-economic damages such as pain and suffering, emotional distress, loss of consortium, and loss of enjoyment.
Awards for physical injury or illness non-taxable and these include medical expenses, unless these expenses have been reported as deductions in the tax return. Lost wages compensation is also non-taxable, as are awards for emotional distress from the illness or physical injury. However, since most personal injury claims take a while to get to the awards or settlement stage, the court or lawyer may impose interest charges for the delay in the payment. The interest charge will become taxable.
All other types of personal injury awards are taxable. For example, compensation for legal injuries from harassment or wrongful termination is taxed, and so is any award for emotional distress not tied to a physical illness or injury. Punitive damages, that amount deemed to serve as punishment to the wrongdoer, is also taxable, whether it is for a physical or legal injury, unless it is to compensate for a wrongful death where the state allows only such awards to be given.
It should be noted that attorney’s fees are not tax-deductible except for certain cases involving discrimination. Unless properly handled, the legal fees, though on contingency basis, may carve a larger-than-expected portion out of the award. Bring these matters up with the attorney and accountant so that an equitable arrangement can be made prior to filing for a personal injury claim in Danville.