What to Do With Your Personal Injury Settlement Money
In most cases, personal injury lawsuits are settled before ever going to (or during) trial; it is rare for a case to require the court’s intervention. As soon as the plaintiff accepts a settlement offer from the defense attorney, the case is settled. In this situation, the only thing your personal injury lawyer needs to do is notify the defense lawyer of your acceptance of the offer.
No Taxes on Physical Injury Compensation Awards
For the most part, any compensation a person receives as a result of a personal injury claim is not taxable by either the federal or state governments. There is no differentiation in whether the case was settled before or after the lawsuit was filed or whether you had to go to trial and allow the court to determine the damage award.
What this means for the injured party is that any damages he or she receives for personal injuries that have the sole purpose of compensating the injured party for things such as medical bills, lost wages, pain and suffering, emotional distress, legal fees, and loss of consortium are not taxable provided they result from a personal injury or physical illness.
Some Exceptions to the General Rule
There are some situations under which awards from a physical injury or illness are taxable. A few examples include the following:
- An injury that resulted from a breach of contract when the breach of contract forms the basis for the lawsuit.
- Awards for punitive damages are always taxable. It is for this reason that lawyers ask the judge or jury to separate the verdict in order to show how much is punitive damages and how much is compensatory damages, the latter of which is non-taxable.
- Any interest a claimant receives as the result of a judgment is taxable. This is calculated from the date a person filed the lawsuit until the time he or she received payment.
- If the settlement is not related to a physical injury, the award is taxable. In other words, if someone is claiming emotional distress or job discrimination, the award is taxable unless the injured party can prove the existence of even a small amount of physical injury.
It’s important to maintain as much non-taxable compensation as possible in order to have the best tax advantage. The best way to ensure that the IRS doesn’t contest the terms of the settlement is for the claimant to make sure the lawyer clearly identifies how much of the award is compensatory damages. All this being said, this article should not be considered as tax advice. We always recommend our clients consult with a tax attorney after settling a case.
Managing a Personal Injury Settlement
A recent study at the University of Pittsburg discovered that those who win the lottery are more likely to go broke. There are also some theories that attempt to shed light on why so many professional athletes are faced with having to file bankruptcy only a few years after they retire. The reality is it takes a good amount of discipline to manage large amounts of money, so it is essential to maximize the potential of a personal injury lawsuit, especially if it is necessary to depend on the funds for a long period of time.
Hire a Professional
If you have obtained a sizeable settlement, it would be a wise decision to use some of the money to hire a financial planner. It is crucial to have a financial team that is interested in the financial health of the client. Avoid using family members unless they have experienced in investments, management or have legal expertise.
Rasansky Law Firm has experts who can help you not only file a personal injury claim but also help you plan a strategy for using the money from the award. If you would like to speak to one of our experts, feel free to visit our website at www.jrlawfirm.com or call our office at 1-877-405-4313.
Category: Family Finances
