Understanding Personal Injury Settlements
According to a health organization, a physical injury is defined as any harm to the body caused by a motor vehicle accident, falls, or trauma. It can include broken bones, cuts, bruises, or physical damage. [1]
Personal injury settlements are the financial compensation you receive after being injured in an accident due to the negligence of another party. These settlements allow you to receive financial coverage for medical bills, lost wages, pain and suffering, and other damages caused by the accident.
Types of Compensation Included in Personal Injury Settlement
Personal injury settlements can include various types of compensation to address the different impacts of the injury that fall in to three main categories:
- Economic Damages: These are quantifiable monetary losses resulting from the injury, such as medical expenses, property damage, lost wages, and future earning potential. Economic damages aim to reimburse the injured party for financial losses directly related to the injury.
- Non-Economic Damages: Non-economic damages are intangible losses that don’t have a direct monetary value, including pain and suffering, emotional distress, loss of enjoyment of life, and loss of consortium. Non-economic damages address the emotional and psychological toll of the injury and seek to compensate for the diminished quality of life caused by the injury.
- Punitive Damages: In extreme negligence or intentional harm cases, punitive damages may be awarded to punish the responsible party and deter similar conduct. Punitive damages go beyond compensating for the victim’s losses and are intended to penalize the defendant for their misconduct.
Taxability of Personal Injury Settlements in Vancouver, Washington
In Washington state, personal injury settlements are generally not subject to state income tax. It means that compensation received from personal injury settlements, including awards for physical injuries, emotional distress, pain and suffering, medical expenses, and lost wages, is typically not taxed at the state level. These include the following amounts:
- The compensation you receive for your physical injury, whether paid in a lump sum or periodic payments, is also known as structured settlement. [2] If you receive a payment for personal physical injuries or illness and haven’t previously deducted medical expenses related to the injury or illness, the entire sum is tax-free. You need not consider the settlement proceeds as your income.
- The proceeds you receive for emotional distress or mental anguish attributable to a personal physical injury are tax-free. Suppose the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury. In that case, you must include them in your income, and it would be taxable income. [4]
- Benefits you receive under an accident or health insurance policy.
- Disability benefits you receive for loss of income as a result of injuries under a no-fault car insurance policy.
- Compensation you receive for permanent loss or loss of use of a part or function of your body. [3]
Certain types of damages, such as punitive damages and interest on the settlement, are subject to taxation in Washington. If a portion of the settlement is allocated to non-physical injury-related claims, such as breach of contract or emotional distress without physical harm, that portion may be taxable.
For federal tax purposes, the taxability of personal injury settlements is based on the damages’ specific nature and the claim’s origin. Generally, compensation for physical injuries is not taxable at the federal level, while non-physical injury-related damages may be subject to taxation.
Contact our experienced lawyers today to understand the tax implications of your personal injury settlement in Vancouver, Washington.
FAQs
Wrongful death settlements in Washington are not taxable. According to the IRS, compensation received for physical injuries or physical sickness is generally not included in your income. [2] Therefore, if a wrongful death settlement is awarded based on the physical injuries or sickness that led to the death, it would likely be considered non-taxable.
Punitive damages in personal injury lawsuits are generally taxable in Vancouver, Washington. According to the IRS, punitive damages are not considered compensation for physical injury or sickness and are taxable as ordinary income. [5] Whether the punitive damages are awarded in a wrongful death settlement or a personal injury lawsuit, they are subject to federal income tax. They are typically subject to state income tax as well.
Sources:
[1] Wounds and Injuries. (n.d.). Fracture | Bruises | MedlinePlus. https://medlineplus.gov/woundsandinjuries.html
[2] Legal settlements – Are they taxable? | Washington Department of Revenue. (n.d.). https://dor.wa.gov/forms-publications/publications-subject/tax-topics/legal-settlements-are-they-taxable
[3] Publication 525 Cat. No. 15047D- Taxable and Nontaxable Income. (n.d.). IRS. Retrieved January 16, 2024, from https://www.irs.gov/pub/irs-pdf/p525.pdf
[4] Settlements – Taxability. (n.d.). IRS. Retrieved January 17, 2024, from https://www.irs.gov/pub/irs-pdf/p4345.pdf
[5] Rev. Rul. 80-211 | Tax Notes. (n.d.). https://www.taxnotes.com/research/federal/irs-guidance/revenue-rulings/rev-rul-80-211/ddvz
