Tax Rules for Personal Injury Settlement in Kansas & Missouri
Whether you have been injured a car accident, motorcycle crash, slip and fall accident, or other personal injury accident, you may be wondering: Is my settlement considered taxable income?
Unfortunately, the short answer is that it depends. In many situations, settlements awarded solely for one’s personal injuries are not subject to state or federal taxes. However, there several exceptions to this general rule. If you miss one of these exceptions, it can cost you at tax time.
Whether one of these exceptions applies to your case depends on several factors, including the types of damages you received. Depending on how your damages were classified in the settlement, certain portions of your settlement may be subject to taxation.
Income Taxes on Damages Included in a Personal Injury Settlement
Below are a few of instances in which some of the proceeds from a personal injury settlement could be subject to income taxes.
However, it is important to remember that tax laws are constantly changing. The information below is not intended to be legal advice and is general information about certain rules currently in effect. If you have questions about the tax implications of your personal injury settlement or award, we strongly recommend that you contact a tax attorney and/or certified public accountant.
Damages for Physical Injuries or Physical Sickness
According to Internal Revenue Service (IRS) Publication 4345 (Rev. 9-2019), settlements for personal injuries or physical sickness are not subject to income taxes. Therefore, if you sustained injuries because of a car accident caused by another’s negligence, a settlement award solely for those personal injuries is not taxed.
However, there is an important exception. Suppose you deducted medical expenses incurred because of the accident on tax returns for prior years. In that case, you would need to include as income the portion of the settlement that reimburses you for those medical expenses. Medical expenses deducted over two or more tax years must be allocated based on a pro-rata basis.
Damages for Mental Anguish or Emotional Distress
Damages for emotional distress and mental anguish are handled in the same way as damages for physical injuries. You do not need to include the settlement proceeds for these damages as income on your tax return unless the emotional distress or mental anguish were not the result of a physical injury or physical sickness.
If the emotional distress or mental anguish were caused by something other than a physical injury or illness, that portion of the settlement proceeds is taxable. However, the amount of your settlement proceeds that you must report as income could be reduced in certain circumstances.
Damages for Lost Wages, Salaries, and Other Income
One of the most complicated issues regarding taxes and personal injury settlements is compensation for lost income. You must check state and federal income tax laws to determine what applies in your case.
Compensation for the loss of income could be included as taxable income on your tax return in certain situations. It is strongly recommended that individuals consult a tax lawyer to discuss what portion of their settlement proceeds could be subject to income taxes. Failing to report the portion of your settlement proceeds that might be taxable could result in penalties and interest.
Punitive damages awarded as part of a personal injury settlement are generally subject to income taxes. They must be reported as income on your tax return.
The reason that punitive damages are taxed is that these damages are not intended to compensate you for a loss. The purpose of punitive damages is to “punish” the defendant for gross negligence or a willful disregard for human life or safety. As a result, it is considered taxable income.
Contact a Kansas City Personal Injury Lawyer for Help
The laws governing taxation of personal injury settlements are complicated and constantly changing. If you have questions about income taxes and personal injury settlements, we strongly encourage you to contact a tax lawyer. We would be happy to provide you with a referral to one in your area.
If you were injured in an accident, we also encourage you to contact our office to speak with a Kansas City personal injury attorney. We want to help you recover the money you deserve. You should not bear the financial burden of an accident or injury caused by another party’s negligence or wrongdoing.
The Law Office of Kevin J. McManus represents accident victims in Missouri and Kansas from our law firm in Kansas City. Contact our office to schedule your free consultation by calling 816-203-0143 or completing our online contact form.