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Is My Settlement Subject To Taxes?

After months and months of litigation, your personal injury claim has finally been settled. Now you need to know if the money is subject to tax.

The answer is usually no as long as it was received due to a physical injury or physical sickness. According to the IRS, "If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income."

If you didn't claim a deduction on your medical bills which resulted from the injury or illness, the settlement money is yours. However, there are cases which deem personal injury settlements taxable. According to the IRS, your settlement is only taxable when it is meant to replace your own income.

Factors considered in making the determination are the type of damages received and the underlying claim that gave rise to the award. Also, some awards are taxed as ordinary income while some as capital gains.

1. Emotional distress - damages awarded are excluded from taxable income
2. Physical injury - compensatory damages are excluded
3. Property - settlement received for the loss-of-use or loss-in-value is taxable if the amount
received exceeds the basis in the property
4. Punitive damages - fully taxable as ordinary income

If you have been injured in an accident by the negligent actions of another person, contact the experienced personal injury attorneys at the law offices of Peach & Weathers. We can more effectively answer questions about taxes on your settlement and any other questions you may have. We are conveniently located in San Bernardino and Riverside Counties.

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