Do I Have to Pay Taxes on My Personal Injury Settlement?

When you suffer personal injuries in Albuquerque and receive compensation through a claim, it is important to be aware of the potential tax ramifications.

Personal injuries can occur in a variety of situations. Car, bike, and pedestrian accidents, slips, trips, or falls, and other types of mishaps can leave you suffering injuries that have the potential to be severe and even life-threatening. When they occur as the result of another person’s negligent actions, you may be entitled to compensation in a personal injury claim. However, it is important to be aware of the possible tax ramifications, which depend on the types of compensation you are awarded.

Are Personal Injury Damages Taxable?

When an accident or injuries occur as the result of the reckless actions of others, you are entitled to compensation under the New Mexico Statutes. Referred to as damages, these can help offset your actual costs, such as medical expenses, lost wages, and any costs due to ongoing disabilities you are likely to suffer in the future. You may also be awarded compensation for the pain, suffering, and mental anguish you and your family endure as the result of the accident or your injuries.

Under Internal Revenue Service (IRS) guidelines, determining whether the compensation you receive through a personal injury lawsuit is taxable depends on the type of damages in your case:

Physical injuries: Compensation for any medical care, testing, and medications you require is generally not taxable, provided you have not taken a deduction for them in prior years and do not itemize medical costs on your current return;

Lost wages: If your injuries prevent you from working and you receive compensation for your lost earnings, you would need to claim this as income and pay taxes on the amount;

Damage to property: If you were compensated for damages to your property, such as your car, you generally are not required to claim this on your tax return;

Pain and suffering: Non-economic damages for pain, suffering, and mental anguish are treated the same as physical injuries. You generally do not have to claim these amounts as income or pay taxes on them.

In addition to the above types of compensation, punitive damages are sometimes awarded in personal injury claims. This is an amount meant to punish the at fault party for behaviors that were particularly willful or reckless. Punitive damages are often based on a percentage of your total claim and can add up to significant amounts. In terms of the IRS, these damages are taxable and should be reported as ‘other income’ on your tax return.

Let Albuquerque Personal Injury Lawyer Ed Chavez Assist You

As an experienced Albuquerque personal injury attorney, Ed has been representing injured clients for over three decades and can guide you through every facet of filing a claim. To discuss your case and the compensation to which you may be entitled, contact the Law Offices of Edward Chavez, Jr. and request a consultation today.