Are Personal Injury Settlements Taxable in Connecticut? 

Personal Injury On Thursday, August 18, 2022

Most of us understand how complicated taxes can be. Unfortunately, when it comes to personal injury settlements, they can be equally as frustrating because the tax laws depend on a number of different factors.

Understanding how taxes work for your settlement will make it easier not only to file your taxes if necessary, but also to determine how much of your settlement you will actually get once everything has been considered.

How Taxes Are Considered

There are three types of settlement monies that are considered from a personal injury case. Depending on how the money is allocated you may or may not have to pay taxes on the settlement.

Financial Damages For Personal Injury

If you receive compensation for financial damages such as travel expenses, medical bills, legal fees and other costs, this money is not taxable so long as medical expenses have yet to be paid on the part of the awardee. Once medical bills are paid by funds received in judgment for the personal injury case, they must be counted as income for the tax year in which they were paid.

If medical expenses have already been incurred, then the portion of the settlement that was allocated for medical expenses must be recorded and taxed as earned income. The rest of the settlement may be considered non-taxable income so long as medical expenses are accounted for.

If money is awarded for lost wages or benefits, this money must also be placed aside and assessed for all social security tax payments as well as medicare and federal taxes. These funds are officially listed as taxable wages and must be filed on the year of taxes in which they were paid.

Interest earned on settlement money is also taxed separately on a separate line on your tax form and is known as “interest income”. It’s important to make sure you include all these different exceptions when you file your taxes or get help from a tax professional to avoid additional fines and penalties.

Emotional Distress and Mental Anguish Related to a Personal Injury Claim

Money received as emotional distress payments is counted the same as money for financial damages unless such funds were allocated to medical treatment. In this case, the medical bills can be deducted as usual.

It’s important to understand how the settlement funds are allocated so that you know how to file them on your taxes. Your personal injury attorney should be able to help you with determining how the funds you receive are dispersed by the courts.

Punitive Damages

Punitive damages are a separate type of compensation that are sometimes awarded based on the severity of the at-fault party’s actions. If the at-fault party is found to be incredibly negligent or malicious in their actions against the victim, then the court may assess punitive damages on top of the other portions of the settlement as a means to punish the behavior and deter future acts.

Punitive damages are counted as “other income” on your taxes and have to be filed as such for the tax year they are received.

If you or a loved one have been injured in an accident and believe you have a personal injury case, contact a personal injury attorney right away and let them help you get the money you deserve.

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