Are You Aware of Whether Personal Injury Settlements Are Taxable in Albuquerque?
According to the Internal Revenue Code, the tax status of personal injury settlements depends on the nature of the damages awarded. While some forms of compensation, such as medical expenses, are not taxable, other damages, such as punitive damages, may be subject to taxation.
What is a Personal Injury Settlement?
A personal injury settlement is a legal agreement that resolves a personal injury claim without needing a trial. The components of the settlement include negotiations between the injured party and the negligent party’s insurance company, as well as the drafting and signing of a settlement agreement.
Factors determining the value of a personal injury settlement include the extent of the victim’s injuries, medical expenses incurred, lost wages, pain and suffering, and any permanent disabilities.
Settlements for personal injury claims often encompass various damages, each serving different purposes and addressing distinct aspects of your losses.
- Economic Damages Settlements: Economic damages refer to the tangible financial losses incurred by you due to the injury. It includes medical expenses, lost wages, property damage, etc.
- Non-economic Damage Settlements: Non-economic damages are intangible losses that are more challenging to quantify but are equally significant in recognizing your suffering. It includes settlements for pain and suffering, loss of enjoyment of life, loss of consortium, etc.
- Punitive Damages Settlements: Punitive damages, also known as exemplary damages, are awarded in cases of extreme negligence or intentional misconduct by the defendant. Unlike economic and non-economic damages, punitive damages are intended to punish the defendant and deter similar behavior in the future.
Types of Personal Injury Claims
In the case of personal injury claims, there are three types of settlements. They include:
- Lump Sum Settlements: This involves the at-fault party or their insurance company making a one-time payment to compensate your losses, such as medical bills, lost income, and pain and suffering.
- Structured Settlements: In this type of settlement, the compensation is paid out over a period of time in the form of regular, periodic payments. It provides long-term financial security for future medical expenses or other ongoing needs.
- Wrongful Death Settlements: If the personal injury results in the death, the victim’s spouse may be entitled to a wrongful death settlement. It compensates for the financial and emotional losses experienced by the spouse due to the deceased person.
Tax Implications in Albuquerque
According to IRC Section 61, all income is taxable from whatever source is derived unless exempted by IRC Section 104. It provides an exemption from taxable income with respect to lawsuits, settlements, and awards. The purpose for which the settlement payment is received must be considered, as not all amounts received from a settlement are exempt from taxes.
Non-Taxable Compensation for Physical Injuries in Albuquerque
The Internal Revenue Code generally excludes compensation for physical injuries or sickness from taxation. Section 104 of the Code outlines five specific areas of exclusion for such compensation:
- Amounts you received under worker’s compensation laws as reparation for personal injuries
- The money you receive as compensation for personal injuries, whether from a lawsuit or settlement, in the form of lump sums or periodic payments
- Money received as a pension, annuity, or similar allowance because of injuries from serving in the military or other designated government service
- The money you receive as disability income due to physical injuries
- Amounts received for medical care related to personal injury [1]
The rationale for these exclusions is that the tax code aims to alleviate the financial burden on individuals who have suffered physical injuries. They are intended to compensate for your pain and suffering, medical expenses, loss of income, and more due to your injuries.
By excluding these types of compensation, the tax law seeks to provide relief when you have been financially impacted by physical injuries or sickness.
When Are Personal Injury Settlements Taxed in Albuquerque?
In Albuquerque, personal injury settlements are generally not subject to federal or state income taxes if awarded as compensation for physical injuries or sickness. However, there are exceptions and specific circumstances where portions of the settlement may be taxable.
Damages received for non-physical injuries such as emotional distress, defamation, and humiliation are taxable. They are only excludable from gross income if they are received on account of physical injury. [2]
Punitive damages typically cannot be excluded from gross income except when awarded for wrongful death claims as specified by state law. [2]
Book a free consultation with Goldberg & Loren’s expert attorneys in Albuquerque today to ensure you are on top of your financial obligations.
FAQs
To determine the tax implications of your personal injury settlement in Albuquerque, consult with our personal injury lawyers in Albuquerque to evaluate the specific details of your settlement and provide guidance on any potential taxation.
Compensation for emotional distress stemming from a personal injury settlement is generally not taxable if it is directly related to physical injuries or illnesses. However, if emotional distress compensation is awarded separately from physical injuries and does not arise from a physical injury or illness, it may be subject to taxation.
Sources:
[1] IRC Section 104 (Compensation for injuries or sickness). (n.d.). https://www.taxnotes.com/research/federal/usc26/104
[2] Tax Implications of Settlements and Judgments | Internal Revenue Service. (n.d.). https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments
