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How to Record Personal Injury Settlement on Taxes in Gallatin, KY?

If you are involved in a car accident in Kentucky, you should be eligible for compensation, as long as you were not at fault for the wreck.

The majority of car accident claims settle out of court. Settlement is a quicker and more cost-effective solution than taking a case to trial.

Regardless of whether your case goes to trial or gets resolved via settlement, it is advisable to retain an experienced personal injury attorney to help you achieve the maximum recovery for your losses.

Here at Flora Templeton Stuart, we can help you negotiate Kentucky car accident settlements seamlessly. We have collected millions of dollars in damages for our Kentuckian clients injured in car wrecks for which they were not at-fault.

Flora Templeton Stuart Accident Injury Lawyers can refer you to a CPA if there are any taxes owed from a personal injury settlement or verdict. Generally, in Kentucky and Tennessee, personal injury recovery is not taxable unless there are punitive damages or wages. 

IRS Code Concerning Personal Injury Settlements

This section of the US tax code shows that non-punitive damages are excluded from your gross income, provided those damages are received due to physical injury or sickness. This applies both to lump sum settlements and staged settlements (periodic smaller payments over time).

This means that any money you receive for general damages and compensatory damages after being injured in an auto accident are not taxable.

The reason underpinning this concerns the purpose of these damages categories. They are intended you to compensate you directly for the following:

  • Lost wages
  • Medical bills
  • Medication costs
  • Rehabilitation treatments
  • Pain and suffering

As such, this portion of the settlement will not be taxable.

Beyond this, all monies awarded for accident-related vehicle damage are also non-taxable, including:

  • Vehicle repairs
  • Reimbursement for rental vehicle

What Damages are Taxable?

Two main types of damages are subject to taxation:

  1. Compensation for lost wages: Assuming that your wages would have been taxable if you were working rather than recuperating from accident injuries, any damages are therefore taxed accordingly.
  2. Punitive damages: More rarely, punitive damages are awarded as a result of the grossly negligent or reckless actions of the at-fault party. If you are awarded punitive damages, those losses will almost always be taxable.

Typically, insurance companies will pay out a lump sum settlement. The insurer will not always provide a breakdown of damages on the accompanying release form, leaving you to correctly allocate various portions of your settlement for tax purposes.

Failing to report compensation liable for taxation attracts the same penalties as those for other unreported income.

Since all personal injury settlements are unique, it is worth consulting a tax professional for specific advice.

Taxable Income Related to Wages

If you are forced to take time off work while recovering from accident-related injuries, your settlement will include compensation for lost wages.

When filing your income taxes, you must disclose all income, including any component for lost wages in a personal injury settlement. You are expected to pay tax on income regardless of who pays your wages.

It is also worth familiarizing yourself with how the IRS views other types of compensation as ordinary income for the purposes of tax. These include:

  • Emotional distress
  • Punitive damages
  • Interest paid on settlement amount
  • Attorney fees (if underlying recovery counts as gross income)
  • Breach of contract and some other non-injury claims awards
  • Punitive damages

When Do Medical Expenses Become Taxable?

You can expect compensation for medical expenses if you are injured in a car accident in Gallatin, Kentucky.

Broadly, medical expenses settlements are not taxable. This form of compensation only becomes taxable when the expenses have been used for a previous tax deduction.

How about taxes on money received as compensation for accident-related pain and suffering?

Taxing authorities will differentiate between pain and suffering damages linked to physical injuries, and damages for emotional distress not linked to physical harm.

Physical injuries can be medically diagnosed. Pain and suffering, by contrast, has no medical diagnosis. That said, emotional suffering is just as valid as physical pain and suffering. Given the interlinked nature of these damages, any compensation related to medical expenses is not taxable.

If you receive compensation for emotional distress that is not directly associated with physical injuries, this money becomes taxable. Symptoms such as vomiting or headaches are not classified as a physical injury in the context of emotional distress.

Are Legal Fees Taxable?

Most people injured in a car accident in Kentucky will retain an attorney on a contingency fee basis. This means paying nothing to the attorney until the case is settled or a favorable verdict is achieved in court. Attorney fees, then, are paid from the settlement.

Although some minor injury claims could be handled without legal representation, hiring an experienced attorney is vital if you want to maximize the compensation you receive.

While you might imagine your final settlement is the amount you take home after paying costs and attorney fees, occasionally the whole settlement is taxable. This applies if the cause of action does not involve physical injury – a wrongful termination lawsuit, for instance. The government is entitled to consider the whole award as your taxable income, rather than waiting until the attorney fees are paid.

If this scenario occurs and you must include your entire compensation amount as income, you may still be able to claim your attorney fees as a deduction. Fees are taxable to the attorney. Seek advice from a qualified tax professional.

Consult An Experienced Accident Injury Attorney

If you are reluctant to engage the services of a certified public accountant or a tax attorney, consider this: these professionals can spend years interpreting single sections of the IRS code, and they can seamlessly advise you about all aspects of paying taxes on a car accident injury settlement.

For anyone anticipating a substantial settlement, it is worth consulting an experienced tax professional before signing a final agreement. If you expect compensation for years of ongoing lost income, for example, you may have alternative settlement options for lowering your tax burden. A structured settlement would help you achieve this.

If you still have questions, you can reach out to Flora Templeton Stuart Accident Injury Lawyers for help with your car accident injury claim in Kentucky today. We have helped thousands of injured clients in personal injury cases and can guide you through the claims process. Call us today for a free consult. 


Author Photo

Flora Templeton Stuart

Flora Templeton Stuart is the lead attorney and founder of the law firm Flora Templeton Stuart Accident Injury Lawyers, established in 1976. She is a nationally recognized personal injury lawyer with over 40 years of experience. Her story has been featured on Fox, The New York Times, ABC, Time, and NBC.