What You Need to Know About Tax on Settlement Payments

Tax on Settlement Payments

Last Updated on May 14, 2024 by Team Experts

According to the IRS, they collected over $3.5 trillion in gross taxes in 2020. As if they didn’t have enough money, they’ll put a tax on settlement payments as well.

But exactly what settlements are subject to taxation? Thankfully, we have the perfect guide to help you find out!

Personal Injury Settlement

If you sued someone after you were injured like in a car accident, your settlement wouldn’t be taxable according to the IRS.

However, keep in mind that if you sued for emotional distress after your accident, those results would be taxable. They don’t count this as a physical injury, so you’d only have to pay taxes on that portion.

Lost Wages

Lost wages will follow under the taxable section. These wages would’ve been taxed under normal income tax if you had received them without dealing with the time away.

This income will be taxed, but you’ll also have to pay Medicare and social security taxes on top of it.

Damages and Interest

Dealing with taxes on settlement payments can be difficult, but damages and interests are definitely difficult.

You’ll have to pay taxes on any interest that you accrue and also for any punitive damages that you won.

Medical Expenses

Even if your injuries were mostly emotional, all of your medical bills are still tax-free. The things that qualify as medical expenses is very broad as well.

For example, if you went to a therapist or a chiropractor, this would count as medical expenses. You can also avoid paying taxes on nontraditional treatments.

There is one exception to this rule. For example, if you already deducted your medical expenses before your suit was settled, you might have to pay these taxes back. This follows the tax benefit rule.

This rule says that if you claimed money for a deduction that produced a tax benefit, then you have to pay that amount in the next year.

Attorney Fees

Keep in mind that you’ll have to pay taxes on your attorney fees as well. This applies if you’re using a lawyer who’s working on a contingent fee.

You should also need to ask for the inheritamce tax. This tax allows deductions for living spouse transfers, charitable gifting money before death, debts, funeral expenses, and administrative costs.

If your recovery is taxable, you’ll have to pay some of the tax for fees for your lawyer.

Selling Structured Settlement

If you’re going to sell your structured settlement, then the payments wouldn’t be taxable. However, the contract provisions can’t change, and the sale will follow the law.

As long as you meet requirements on your sale, like having oversight and approval from a judge, then you shouldn’t have to pay taxes.

Learn More About Tax on Settlement Payments

These are only a few things to know about tax on settlement payments, but there are many more things to keep in mind.

We know that keeping up with financial laws can be stressful, but we’re here to help you out.

If you enjoyed this article, make sure that you explore our website to find more articles just like this one!

Also read about: What You Need To Know About Opening a Bank Account


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She has over 7 years of experience writing about technology, education, digital marketing, general and business. Her experience in the tech industry (fieldengineer, wowtechub, techsprohub, techinfobeez) has taught her how to write engaging, informative content that makes complex issues accessible to a wide audience. Follow her on Linkedin

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