When you file a personal injury lawsuit in Sacramento, California, taxes are probably the furthest thing from your mind. But it’s important to understand how the state and federal government will assess the settlement you receive once you win it. Knowing the tax requirements before fighting your case can also be helpful.
Thankfully, most of your personal injury settlement will be non-taxable. The state of California doesn’t impose any taxes on personal injury settlements. However, the federal government has some exceptions.
It’s important to stay in compliance with the law, which is why discussing your accident with a Sacramento personal injury lawyer from Crowell Law Offices can be key. Not only will our team fight for you in court, but we’ll make sure you understand how to handle your money after your case closes.
Medical expenses are one of the biggest awards in many personal injury cases. Your settlement for medical expenses is tax-free unless you paid for medical costs for more than one year and added an itemized deduction to your taxes for medical costs in previous years.
In this case, you must pay pro rata taxes on the medical expenses you paid each year you listed them as deductions. If you didn’t take an itemized deduction for medical costs in previous years, then your full medical settlement is tax-free.
If you win an award for lost wages in your personal injury settlement, you must pay federal income tax on this award. If you would have been able to work, you would have paid Social Security or Medicare taxes for these wages, which is why this money is taxable. The level of tax you pay will depend on your previous job position.
If you win an award for property damage, you won’t need to pay taxes as long as the settlement is less than the adjusted basis of your lost property. But if your settlement amount exceeds the adjusted basis of your lost property, then you must pay taxes on the excess amount received.
You won’t have to pay taxes if you receive an award for non-economic damages, including mental or emotional distress. You also won’t have to pay taxes on related medical expenses such as therapy.
If you win punitive damages in your case, you must pay federal tax on this award. You also must pay taxes on any interest you receive during the legal process. For example, you may collect interest on your settlement during the time your case is pending.
Paying taxes for personal injury settlements can be hard to figure out. A Sacramento personal injury lawyer from Crowell Law Offices will maximize your claim and help you handle the money you win accordingly. That way, you can walk away from your accident feeling free. To schedule a free consultation with our team, fill out the contact form below or call 916-303-2800.