Hurt in an accident in Kansas City? You need compensation to pay bills and support your family. This raises an important question: Will my personal injury settlement be taxed? While the specifics always matter, the answer is generally “no”—personal injury compensation is usually not counted as taxable income. Here, our Kansas City personal injury attorney provides a guide to the general rules on taxation for personal injury settlements and verdicts.
Background: Personal Injury Compensation Designed to Make Victim “Whole”
As a starting point, it is useful to understand what personal injury compensation is designed to do. The purpose of compensation—whether for medical bills, or pain and suffering—is to make the victim “whole.” In other words, personal injury compensation is designed to restore the victim to the financial position they were in before the injury. The victim is not getting a “windfall” in a settlement—they are getting the compensation that they need to put the pieces back together.
Know the Rule: IRS Regulations and Personal Injury Settlements
Given that personal injury compensation is simply meant to restore the victim to where he or she was before the accident, the Internal Revenue Service (IRS) does not treat a settlement like other types of income. Indeed, while many legal settlements are taxable. Federal regulations (IRC Section 104) hold that personal injury compensation is usually not counted as taxable income. Indeed, the amount received for medical costs, pain and suffering, and other non-economic damages are generally tax-exempt as long as you had a physical injury.
The Exception: Punitive Damages
Punitive damages in personal injury claims are awarded to punish the defendant for particularly harmful behavior and deter similar actions in the future. Unlike compensatory damages, which address the victim’s losses, punitive damages are considered a form of punishment against the at-fault party. It is important to note that punitive damages are taxable. When awarded, they must be reported as income, and they will generally be subject to tax liability.
Federal Tax Filing Requirements for a Personal Injury Settlement
Injured victims in Kansas City should also know that there may be tax filing requirements even without any tax liability for their personal injury settlement. Indeed, even if your personal injury settlement does not include punitive damages and is thus not taxable, you often still need to report the settlement to the IRS. Typically that reporting is done with IRS Form 1099-MISC—and it should be submitted by the payer of the personal injury settlement.
Set Up a Free Consultation With a Top-Tier Kansas Personal Injury Lawyer Today
At House Law LLC, our Kansas City personal injury attorney is the standout choice for injured victims. If you have any questions about personal injury settlements and taxes, we can help. Reach out to us by phone or contact us online for your no-cost, no-obligation case review. With an office in Kansas City, we handle claims in Missouri and Kansas.
Tags: brain injury, personal injury, traumatic brain injury
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