Are Personal Injury Settlements Taxable in California?
Living with a serious personal injury can be challenging for victims and their families. When an award is granted by a jury or a settlement is reached between the parties, the award is typically granted in a lump sum payment or by a structured settlement. Structured settlements pay the victim the award over a set period of time. In both cases, the award is intended to help the victim and their family move forward, and to pay for future care.
Generally, personal injury awards in California are not subject to taxation because the awards are not considered income. The money a victim receives is theirs to keep, subject to any outstanding liens and limited exceptions.
What parts of a personal injury settlement can be taxed by California?
Personal injury settlements can result in compensatory damages and punitive damages. There are two types of compensatory damages: special damages and general damages. Special damages include economic losses, such as lost wages and medical bills. General damages cover intangible losses, such as pain and suffering or loss of consortium. Typically, compensatory damages cannot be taxed.
Punitive damages are awarded to punish a wrongdoer for especially egregious behavior and are taxable under California law. Furthermore, any interest earned on an award is also taxable. This is true whether the award money is invested or placed in a high-yield savings account.
Victims may also be taxed on any award that exceeds the costs of their losses. If a victim is awarded $50,000 for the loss of a vehicle in a crash, but the car was only valued at $25,000, the victim may be taxed on the remaining $25,000.
In sum, the majority of a personal injury settlement in California is not subject to taxation, except in the limited circumstances stated above. In such cases, a skilled personal injury attorney can discuss the possibility of working with a tax expert in regard to the injury award, if needed.
Can the federal government tax me on my personal injury settlement?
Similar to state taxes, the Internal Revenue Service (IRS) typically does not tax personal injury awards. For example, if an award was received due to a jury verdict, the IRS will not tax the award. Additionally, if the personal injury award is for personal, physical injuries, or ailments, it does not need to be reported as income. This includes situations where the award is for mental anguish or distress, so long as that distress stems from a physical trauma relating to the incident.
However, punitive damages, interest on an award, and awards in excess of damages are taxable by the IRS. The IRS has additional guidelines when it comes to taxing awards:
- Lost wages. Since victims pay taxes on their wages, the IRS may tax victims on an award for lost wages. However, victims are not taxed if the lost wages are a result of the physical injury at issue.
- Emotional distress. If a victim is awarded damages solely for emotional or mental distress, the damages are subject to taxation by the federal government.
- Previously claimed medical expenses. The IRS must be notified of any medical expenses related to the incident in question if the expenses are on a previous tax return.
It bears emphasis that a recipient of a personal injury award may need to file taxes and itemize any and all deductions relating to the sustained injuries. Since the amount of taxable funds may increase or decrease depending on the case, providing medical and legal documentation to accompany the tax filing may help ensure accurate taxation by the government.
Can the IRS come after a personal injury award if the victim owes back taxes?
If the IRS has already put a lien on the victim’s property, it can collect taxes from the awarded punitive damages or interest accrued.
Since no two cases are the same and the laws surrounding personal injury awards and taxes are intricate, it is impossible to guarantee any financial outcome for victims. However, experienced attorneys, such as those at McNicholas & McNicholas, have extensive knowledge in the relevant fields and work to ensure that victims are keeping as much of their personal injury award as possible.
If you have been injured, do not let the fear of taxes prevent you from reaching out today. Call or use our contact form to schedule a remote consultation to learn more about how we can help.
Please note that this blog is not to be construed as legal advice. Because every case is fact-specific, you should consult directly with an attorney to obtain legal advice specific to your situation.
With more than 25 years’ experience as a trial lawyer, Partner Patrick McNicholas exclusively represents victims in personal injury, product liability, sexual assault and other consumer-oriented matters, such as civil rights, aviation disasters and class actions. Learn more about his professional background here.