For civilians involved in a Florida lawsuit, receiving a fair settlement is the crowning achievement after months of litigation. While the process of earning compensation may take a great deal of patience, the final reward is intended to offset the burden of medical bills, lost wages, and any other extenuating expenses resulting from an accident. By the time all parties have reached an agreed-upon settlement, you’ll be more than ready to celebrate. Or at least, breathe a sigh of relief.
However, even after a resolution is reached, there are many things you’ll need to still consider, especially once the payment is received. One of the most important being — how you’ll handle your taxes. For settlements that exceed a certain sum, the IRS could have a say in the amount that is owed back to the government. Because Florida does not impose a state income tax, you’ll only need to worry about how this amount will impact your federal return.
With that in mind, there are specific tax implications for those who receive a personal injury settlement in Florida. While not all cases require a full report to the Internal Revenue Service, it’s important to know how to file correctly and what documentation you’ll need to satisfy Florida tax laws. Our team of personal injury attorneys are committed to helping you through the process of a personal injury claim from start to finish. And yes, that even means when it comes time to file your taxes!
Although being awarded damages is the end game, we want to make sure you’re more than equipped for the steps that lie ahead, which is why we’ll always keep you informed on your tax liability. Whether the details of your case are simple or a bit challenging, we’re ready to support you and help break down when it’s time to pay taxes on a lawsuit settlement.
Contact us today for a free case review or schedule a sit-down meeting with Peter J. Porcaro and his team of legal experts.
Overview of Personal Injury Settlements in Florida
A settlement agreement is reached when both parties have presented their case and negotiated fair compensation in exchange for injuries, physical damage, emotional distress as well as other compensatory damages. Florida law dictates that the negligent party be held responsible for any injuries, given the statute of limitations to file a personal injury claim remains four years. Once the action is filed, a Florida attorney will help you gather relevant evidence and information related to your case in pursuit of compensation.
This includes proof of economic and non-economic damages, consisting of medical bills, lost wages, emotional distress, and punitive damages. Factoring in the uncertainty of going to court, a personal injury settlement is often the most recommended and safer alternative for securing financial relief in legal circumstances. Your settlement agreement is able to cover both compensatory damages, such as loss of income, and non-pecuniary harms like pain and suffering.
Do you pay taxes on a lawsuit settlement?
According to Section 61(a) of the Internal Revenue Code, gross income is defined as income from whatever source derived, including (but not limited to) “compensation for services, including fees, commissions, fringe benefits and similar items.” Under Florida law, the dollars earned on a settlement are legally considered a form of income, if and only if, the case did not result in physical harm.
Now the question being: Is a personal injury settlement taxable?
The answer: It depends.
Your settlement is subject to taxes when compensatory damages and punitive damages are involved. Just the opposite, a personal injury settlement, which calls for bodily injury and/or physical damage, almost always remains exempt from Florida tax codes and laws.
The circumstances in which you’ll be required to report compensation to the IRS involve:
- Lost wages
- Wrongful termination
- Punitive damages
Any money that is awarded for reasons beyond personal injury (unless deductions are collected years prior) are relative to review by the IRS. Further below we’ll detail where to file these types of damages so you can adhere to Florida laws and regulations.
Exceptions and Exclusions
The taxability of a personal injury settlement is dependent on the case. For example, car accident settlements and slip and fall damages are almost always non taxable due to the extent of injuries. These types of accidents often exhibit “observable bodily harm”, which the IRS can visually determine as a reason for compensation.
To illustrate, persons involved in a car accident in Florida will typically seek medical attention after reporting the incident to law enforcement. Depending on the severity of the accident and breadth of injuries, medical expenses can pile up quickly, leaving a person both financially burdened and emotionally distressed.
The decision to pursue a personal injury lawsuit, in this case, becomes the obvious choice. When the suffering is the direct cause of someone else’s negligence, a personal injury lawsuit is the best course of action for recovering damages. The following lawsuit settlements are almost always non taxable, meaning they are exempt from Florida’s income rule:
- Physical injury
- Car accident injury
- Medical expenses (only if no deduction was previously taken)
- Emotional distress
If you receive a car accident settlement or slip or fall settlement in a given tax year, there is no requirement for you to document the awarded damages in the income section of your tax form. That said, we recommend consulting with a tax professional before you file to avoid any errors in reporting.
Reporting Personal Injury Settlements on Tax Returns
Now that you know the answer to, “Is a personal injury settlement taxable?” Let’s break down the process of reporting certain earnings to the IRS. Florida law generally does not require you to report a personal injury settlement because the damages are backed by physical evidence. On the other hand, you are obligated to report earnings that result from wrongful termination or any circumstance where compensatory income is given.
Punitive damages and interest, along with the other taxable settlements mentioned above, are to be reported as “Other Income” on line 21 of Form 1040-MISC, Schedule 1. There you may include any amounts pertaining to your legal settlement that are overseen by the IRS.
With the help of an experienced personal injury attorney, you have the opportunity to minimize your tax liability and maximize your settlement amount. Of course, this is only made possible if the facts of your case are clearly backed by evidence. Ultimately, the IRS is not responsible for informing you of whether or not your settlement is taxable under Florida legislation. Your attorney will guide you on these matters and make sure all documentation is accurate and up-to-code.
As previously noted, there are times when compensation is subject to taxation. Money awarded for lost wages is a common scenario when the IRS expects you to claim these payments as income. Another example is when interest is incurred for any pre or post settlement arrangements. In terms of physical injury or sometimes damage, however, you are almost always exempt from listing the amount on the income section of your tax form.
All in all, it takes good judgment and a thorough understanding of Florida tax laws to make the right decision when filing your taxes. Because personal injury claims tend to be multifaceted, meaning there can be multiple outcomes and various damages, your tax process can easily become more complex.
If you’re questioning whether you should include your settlement amount on your annual tax return, consider sitting down with an accountant or talking with an experienced attorney to ensure you are in compliance with all relevant laws and regulations. In any case, it’s best to ask the experts rather than assume you have the right outcome.
Contact Porcaro Law Group for guidance
The attorneys at Porcaro Law Group understand the confusion that surrounds filing your taxes, let alone filing your taxes after being awarded a personal injury settlement. While our personal injury lawyers fight tirelessly to get you the compensation you deserve, there are certain instances when your obligations as a taxpayer will require a bit more legwork and financial obligations. Because each settlement is unique, your personal injury attorney will know exactly how to settle your case and keep the right documentation at hand for future tax purposes. By the time you’re ready to file, you’ll have all the information you need for determining if your settlement is tax-free.
Interested in learning more about the taxability of a personal injury settlement? Call our Delray Beach office today to speak with an experienced South Florida attorney.