For anyone in Connecticut who has experienced a personal injury or wrongful death, receiving a personal injury settlement or award is wonderful news. You can take the settlement you've been awarded and pay your medical expenses and put your life back on track. A common question we are asked is whether or not taxes must be paid on a personal injury settlement.
Though you may worry about being taxed from your settlement payout if you are successful in getting a settlement, the good news is that although some types of compensation may be subject to taxes, compensation for your injuries is typically not taxed. The subject of settlements and taxes in Connecticut will be covered in the following article.
If you've been injured in an accident and need legal assistance, call the CT personal injury lawyers at Brandon J. Broderick, Attorney at Law. Our legal experience in Connecticut will allow us to successfully handle your case and get you a fair settlement.
Personal Injury Settlements and Taxes in Connecticut
If a settlement or judgment is deemed "Gross Income," it may be subject to state or federal taxes, or both. Connecticut defines "gross income" as all money, goods, property, and services that are not exempt from federal income tax.
Internal Revenue Code (IRC) Section 61 outlines the IRS's general policy on the taxability of sums obtained as part of litigation settlements and other legal remedies. Unless specifically exempted by another part of the legislation, this section says that all income, regardless of its source, is subject to taxation.
Suits, settlements, and awards are exempt from taxable income under Internal Revenue Code (IRC) Section 104. However, since not all income received from a settlement is exempt from taxes, it is important to take into account the specifics of each settlement payment when determining the use for which the money was obtained. The first important inquiry to make is, "What was the settlement (and its corresponding payments) intended to replace?"
IRC Section
Unless a special exception applies, all sums from any source are included in gross income, according to IRC Section 61. The two most common exceptions to the rule regarding damages is money paid in connection with specific discrimination claims or paid due to physical injury.
According to IRC Section 104, gross income does not include compensation for personal physical injuries and physical injuries.
The amount of "any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or physical sickness" may be excluded from gross income under IRC Section 104(a)(2).
Damages received on account of personal physical injuries or physical illness are defined by Reg. Section 1.104-1(c) as any sum obtained (other than workers' compensation) through the filing of a lawsuit or legal action or through the execution of a settlement agreement in lieu of filing a lawsuit.
In summary, the amount received for compensatory damages is not taxable under federal or state law, which is a typical rule applicable to personal injury cases. This rule is applicable whether the claim was settled before or after legal action was taken, or if the funds were given as part of a verdict after a trial.
The general rule is justified by the fact that compensatory damages are intended to essentially reimburse a person for the losses they sustained as a result of an injury. As a result, there is no net gain from the revenues because any compensated gain is intended to cover the losses.
Exceptions To Connecticut Law On Personal Injury Claims and Taxation
The general rule has a number of exceptions, which can make figuring out the taxable portions of settlement payments difficult. Potentially substantial tax penalties could occur if taxable parts of a personal injury settlement are not correctly included.
These could include:
Punitive Damages and Interest
Punitive damages may occasionally be awarded as additional punishment for the liable party's negligent or purposeful actions in order to deter future occurrences of the same behavior. Punitive damages are paid in addition to compensatory damages, and as a result, the proceeds are usually subject to taxation.
Furthermore, interest received from a judgment or settlement from a personal injury claim is typically taxed. For the duration that the case was pending in court, many states have court regulations that award interest on a personal injury settlement or verdict.
For instance, if a verdict awards damages to a plaintiff a year after the lawsuit was filed, the plaintiff may be entitled to interest on the award amount beginning on the date the lawsuit was filed and continuing until the award is paid.
Other Exceptions
A victim of an accident may occasionally suffer from emotional distress and be awarded damages. An injury frequently leads to emotional distress, such as worry or depression after a serious injury. It may, however, also be unrelated to any injury, such as witnessing a close relative die.
Any compensation is often not taxed if the emotional distress damages are linked to a physical injury or illness. The compensation is often taxed if the damages are not due to a physical injury or illness.
Compensation for lost wages while a person recovers from an injury is usually included in personal injury settlements. Unfortunately, the IRS states that this share of a settlement is typically taxable as income.
Contact Brandon J. Broderick For Assistance With Your Settlement
An expert CT personal injury lawyer will help you every step of the way with your personal injury lawsuit. Brandon J. Broderick, Attorney at Law has a well-qualified team to offer support and guidance.
If you need assistance receiving full compensation for your injuries following an accident, get in touch with us today to schedule a free consultation.