Picture this; you have endured a personal injury accident that was caused by someone else’s negligence. Let’s say that you were biking down the road in Los Angeles when a driver failed to check the bike lane and merged into you as he slowed to look for a parking spot. That driver is at fault for your injuries, and after long and tiresome legal proceedings, you and your legal team settle with the driver. You receive your funds and are now left wondering, do I have to pay taxes on this?
Generally speaking, no, you do not.
Under both state and federal law, compensation for physical injury or physical sickness is not taxable. This money will cover your medical bills, replace your wages, or compensate you for pain and suffering. It does not matter if you received this money as a part of a settlement or from a trial verdict. If the funds are compensation for your injury or illness, you do not owe taxes on them.
There are conditions under which you would owe taxes on your injury settlement, but they are not common. Firstly, you would owe taxes on damages awarded due to a breach of contract. Secondly, if the damages you receive are punitive (i.e., meant to punish the defendant by causing financial hardship), that money would be taxable as well. Lastly, you can be taxed on the interest you collect during the personal injury proceedings.
Tax law surrounding personal injury settlements can quickly get complicated, and the taxes you owe can vary significantly based on your specific situation. Tax fees are not something that you want to screw up, so once you receive a settlement from a personal injury case, make sure to consult a tax specialist to make sure that you handle everything correctly.
Our law firm would be happy to refer you to a successful and trustworthy tax professional, so feel free to call us at any time for help and support. Remember, once you are at the point of figuring out tax payments on your personal injury damages in Los Angeles, the hard part is over. You have already survived your accident and recovered appropriate compensation.
The last step before you can close the book on this chapter of your life is paying the appropriate taxes. Once that is done, you can truly move on from the entire experience.