No income tax
Few realize that compensation from an injury is not subject to income tax.
The Internal Revenue Service (IRS) expressly excludes damages received as a result of personal physical injuries or physical sickness from a taxpayer’s gross income. Therefore, it is not even considered.
- With all the taxes we pay, compensation is one of the last bastions tax-free money.
- This is because compensation is not “income.”
- Remember that we tax income with an income tax.
- And we tax gains with capital gains.
- A personal injury settlement is not “gain.” It is considered “compensation.”
- In other words, getting you back to zero, or at least closer.
- This is true even if the settlement involves millions of dollars, which some of mine have.
- Whether we settled the case before or after filing a lawsuit in court, or win a big verdict, the result is the same.
Personal injury damages are usually medical bills, loss of enjoyment of life, emotional distress, pain and suffering, loss of consortium (spousal damages), and lost wages and are not taxable when caused by a personal injury.
Only the rarest cases that involve things like punitive damages, front and back pay in employment law cases, and significant confidentiality agreements are potentially subject to income tax.
Mr. Peel seeks justice for those injured in tractor trailer and car accidents, medical malpractice, and disability. He often addresses churches, clubs and groups without charge. Mr. Peel may be reached through PeelLawFirm.com wherein other articles may be accessed.
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