If you live in Ohio and have recently received a personal injury settlement, you may wonder: “Are personal injury settlements taxable?” The lawyers at Dyer, Garofalo, Mann & Schultz appreciate how important it is for you to learn about your settlement’s tax consequences for optimal financial planning and the avoidance of unexpected liabilities during tax time. Our lawyers have years of experience in guiding clients through the legal and financial complexities of personal injury settlements. Here, we will discuss which portions of your settlement may be taxable, which portions are not, and how state and federal tax laws apply to you.
As stated, whether or not a recovery of a personal injury settlement is considered taxable involves reviewing the interplay that naturally arises between federal and state laws regarding taxable income. Generally, such rules imposed by the IRS and the State of Ohio mirror each other with minimal variation. In rare situations, however, critical issues have a greater degree of important variation.
Under federal law, personal injury settlements are not necessarily deemed as taxable income. The IRS distinguishes compensation arising due to physical injuries or sickness from other types of compensatory damages that might be regarded as taxable income, such as punitive damages or lost wages.
Ohio follows most of the federal guidelines for determining taxable income very closely, though a number of specific exemptions and deductions might be considered for Ohio taxpayers.
The IRS typically considers compensation for physical injuries or medical expenses to be non-taxable. These settlements aim to make victims whole again after an injury, not to serve as income. Ohio taxpayers benefit from these exemptions as well.
If your settlement compensates you for medical costs related to physical injuries, such as hospital bills or rehabilitation, this portion of your settlement is not taxed. This applies whether you paid out-of-pocket for the medical expenses or your insurance provider paid for it.
Awards for emotional distress or mental anguish directly related to physical injuries are also not subject to taxation. For example, if you developed PTSD due to a car accident, the damages for such could be treated as non-taxable.
Car accident settlements often include damages for physical injuries, lost wages, and emotional distress. In Ohio, the physical injury portion of these settlements is generally tax-exempt. However, this amount needs to be carved out with care in your settlement agreement to avoid confusion.
If your settlement reimburses you for medical expenses you already paid, these amounts are excludable from income, as long as you didn’t previously deduct those expenses on your tax return. Otherwise, the IRS won’t permit you to double dip by taking both a deduction and a tax-free reimbursement.
Not all components of a personal injury settlement are tax-free. Certain types of compensation are considered taxable by both the IRS and the State of Ohio.
When your settlement includes compensation for lost wages, this portion is subject to both federal and state income taxes. The reasoning is simple: had you been able to work, those wages would have been taxed as regular income.
Punitive damages, which are awarded to punish the defendant for gross negligence or intentional misconduct, are always taxable. Because punitive damages awarded in Ohio are considered independent of compensatory damages, they will be treated as taxable income.
The interest income is taxable when your settlement payment includes an accumulation of interest from your date of injury to when you finally get your settlement. If a case drags on for many years and results in a settlement, there will surely be interest on any amount of the settlement that is indeed taxable.
The IRS considers damages for emotional distress not resulting from a physical injury to be taxable. For example, if you suffered mental anguish resulting from harassment or discrimination alone, without any physical injury, the resultant settlement for emotional distress is consequently treated as taxable income.
Immediately after receiving an Ohio personal injury settlement, one has to take extra steps in managing his or her funds to avoid any sudden impact of taxes. Most of the personal injury settlements have their nontaxable and taxable portion; thus, handling them carefully may save you a lot from stress, time, and probably legal entanglements.
Taxation laws concerning personal injury settlements can be quite confusing. One should consult a CPA or a tax attorney experienced in personal injury cases. Such professionals will help identify what portions of your settlement are taxable-for example, punitive damages or interest-and which are not, such as compensation for physical injuries.
Your settlement agreement must distinguish clearly between the portion that is taxable and that which is not. For example, medical expenses or disfigurement compensations generally fall into a non-taxable category, while punitive damages, lost wages, and accrued interest are regarded as taxable. Reviewing the agreement helps ensure that funds allocation is well-documented, thereby minimizing the chances of disputes with the IRS or Ohio tax authorities. If not, the agreement should be remedied forthwith with your attorney or tax professional.
If your settlement includes taxable portions, such as lost wages or punitive damages, plan accordingly by setting aside a portion of the funds for taxes. This step ensures that when tax season arrives, you are prepared to pay your liability without financial strain. Proper planning prevents surprises and helps you preserve the bulk of your settlement.
Settling these steps will ensure the effective management of your settlement in compliance with tax laws.
No, compensation for physical injuries or medical expenses is generally not taxed. Nonetheless, portions of a settlement related to lost wages, punitive damages, or interest are considered taxable income.
Lost wages are taxable at both federal and state levels. You’ll need to report this portion of your settlement on your tax return, just as you would have reported your regular earnings.
No, you are not required to report the non-taxable portions of your settlement. However, you will need to keep documentation to prove up non-taxable status in the event of an audit.
Personal injury settlements are usually complicated with regard to federal and state tax issues. An experienced attorney can structure your settlement to minimize tax burdens, define what is taxable and what is not, and protect your award for long-term financial security.
If you are one of those who have come into a personal injury settlement and do not know what to do, then attorneys at Dyer, Garofalo, Mann & Schultz can help you in this regard. Call us today at 1.937.222.2222 or visit our office located at 131 N Ludlow St #1400, Dayton, OH 45402, to schedule your free consultation today.
Before establishing Dyer, Garofalo, Mann & Schultz L.P.A., Doug Mann, a top Ohio Injury Attorney served as a bodily injury claims adjuster at a major insurance firm. With over 40+ years of experience, Doug’s background has proven invaluable in securing maximum cash settlements for his clients swiftly. Since leaving the insurance industry, Doug has devoted his entire legal career to assisting injured clients during their times of greatest need.
This page has been written, edited, and reviewed by a team of legal writers following our comprehensive editorial guidelines. This page was approved by Founding Partner, Doug Mann who has more than 20 years of legal experience as a practicing personal injury attorney.
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