What You Must Pay to the IRS From a Settlement

While your accident settlement is meant to compensate you for the injuries that you suffer, there are obligations to pay part of the settlement to the IRS and state government depending on what it is meant to compensate you for.

Declare Your Accident Settlement on Your Tax Return

When you are filing your tax return for the income year of your settlement, you must disclose your settlement proceeds on your tax return. You will need to specify which part of the settlement is lost wages. You will need the advice of an injury attorney and an accountant to know which parts of your payment are taxable because you can get hit with back taxes and penalties even if you are permanently injured. There are ways to minimize the taxes that you will have to pay with some forethought and planning.

Pain and Suffering Damages Are Yours

Medical bills and pain and suffering are not taxable. These items of a settlement compensate you for the distress and discomfort that you have experienced. There is no windfall or anything that you have earned that would necessitate that you pay taxes on this part of the settlement. The rule on pain and suffering only extends to a physical injury and not an emotional one. Thus, emotional distress damages are subject to income tax.

Lost Wages Are Taxable

One part of the compensation is lost wages that will pay you the amount that you would have made while working. You must pay both state and federal taxes on lost wages because you would have earned these had you worked. These can be taxed at a higher rate than ordinary because you are receiving the income in one year, so it looks like you earn at a higher rate. Las Vegas injury attorneys can help you structure your settlement to reduce your tax burden. Another part of settlements that is taxable is punitive damages.