If you received a personal injury settlement, that typically means someone caused you harm through their negligence. In some settlements, the value can be quite high, and the risk of tax implications could be worrisome. Most of the time, proceeds from Nashville personal injury settlements are not taxable. However, there are a few factors to consider.
Types of Damages and Taxability
Most personal injury settlements are not subject to state or federal government taxation. There are some exceptions to this, based on the type of personal injury damages you received. In the ideal situation, you should work closely with a tax professional to learn how these funds impact your financial situation.
Economic Damages and Taxes
Economic damages are some of the most common awards. These cover the losses that are quantifiable, often with a receipt for what was paid or owed. Economic damages may include:
- Medical expenses
- Lost wages
- Property damage
- Ongoing medical and mental health support
None of this is personal income, which means it is not taxed as such. You should not pay taxes on any of these settlement values.
Non-Economic Damages
Non-economic damages award you compensation for losses you suffered. They tend to be less quantifiable. This may include:
- Physical pain and suffering
- Emotional trauma and mental health losses
- Loss of consortium
These non-economic damages are not taxable in Tennessee. As non-punitive damages, they are not taxable under IRS code 26 USC 104: Compensation for Injuries or Sickness either. These damages are not thought of as income.
Some Settlements May Have Taxes Applicable
There are some situations where you may be awarded additional damages that could be considered income for you. In those situations, you may have to pay Tennessee income tax as well as federal tax on the amount you receive. This might include:
- Punitive damages: These damages are awarded to you in very rare situations. They typically only apply as a type of punishment against the at-fault party for particularly heinous and reckless behavior.
- Interest paid to you: If you are paid interest on the personal injury settlement payment, because it was not paid immediately, and the court awarded you interest, this is considered income.
- Lost wages and future lost wages: You may have to pay taxes at your employment rate, based on earnings. These are taxes you likely would have paid anyway if you received the funds through the traditional means of earning a paycheck.
You may not be sure how some of these factors impact your case. It is important not to assume you owe nothing. Instead, speak to both your personal injury attorney in Tennessee and your local tax professional. They will help you determine all of your losses.
Reducing Taxation on Settlements
You may also be able to reduce some of the taxability on your settlements through various legal strategies. That may include allocating funds into categories that minimize taxes required or structuring the income you receive over time as a form of income. This is always something to discuss with your attorney.
Getting Legal Help Matters
If you are hurt and suffering losses, taxes can seem like another financial blow. Most of the time, you do not pay anything out of pocket, though. To maximize your claim and protect your settlement, seek the help of an attorney.