You have just received a substantial settlement for your personal injury claim that includes medical expenses, future medical expenses, wage loss, property damage to your vehicle, emotional distress, and pain and suffering. However, you are concerned that the compensation you received will be heavily taxed by Massachusetts and federal tax authorities. So, will the compensation you just recovered be subject to taxes that could substantially decrease what you rightly deserved for suffering a serious injury?
The good news is that in most cases, none of the compensation you recovered is considered taxable income. You can use the funds to pay off unpaid medical and other bills, to return to school, take a vacation, or to spend it on anything you want without fear of the IRS or Massachusetts tax authorities coming after you.
PI Settlements MA – Exceptions to Rule
Medical Expenses
There are some exceptions to this general rule. For example, if you claimed the medical expenses related to your injury as an itemized tax deduction, then you cannot use the exemption again. If you did use the deduction in past tax filings, then you must report the medical expenses recovery portion of your settlement or recovery as income unless you can show that your award is solely for emotional distress or pain and suffering.
If you are planning to use the medical expenses you incurred as a deduction on your taxes, consult with your personal injury attorney before doing so.
Property Damage
Property damage claims are generally settled before the personal injury claim and any recovery is generally not taxable. However, if your property damage recovery is greater than the property adjusted basis, then that additional amount is taxable.
Emotional Distress
Another exception is if your medical expenses or lost earnings are solely related to the emotional distress you suffered in an accident with no accompanying physical injury. You could have been a driver or passenger in a vehicle that was struck by another vehicle that ran a red light. Although you suffered no injuries, the trauma of the event may have caused you to fear driving or being in a motor vehicle, that you suffered loss of sleep, an inability to focus or to engage in your usual work, and extreme anxiety that has led to counseling and prescribed medications. In this scenario, then your recovery is subject to being taxed.
Another scenario is where you witnessed a close family member suffer serious or fatal injuries. Massachusetts recognizes a cause of action for negligent infliction of emotional distress in such cases, but any recovery for out-of-pocket expenses are not exempt from taxation. But if your emotional distress accompanied a physical injury, then the medical and other economic losses are exempt.
Pain and Suffering
Pain and suffering is generally a category of damages where the largest award is given by a jury. Any award for this is not considered taxable income.
Interest on a Settlement or Verdict
In some cases, usually following a jury verdict for monetary compensation, the presiding judge will impose interest on the verdict amount. In some cases, the losing defendant will appeal the verdict that can take many months or even years before an appellate court rules on it. Any interest that accumulates on the award is subject to taxation, though the principal amount is not.
Punitive Damages
Punitive damages are another category of damages or compensation that is not subject to taxation. These are damages designed to punish the defendant and to deter others from similar conduct. Punitive damages are not covered by insurance so any award would have to be from a jury. Such awards are given if the defendant’s conduct was grossly negligent or egregious or exhibited a wanton and reckless disregard for the safety and life of the plaintiff. In Massachusetts, punitive damages are only available in wrongful death cases.
Retain the Law Office of Burns and Jain
The personal injury attorneys at Burns and Jain have been representing the interests of injured clients throughout Massachusetts for decades. Let us handle your personal injury claim from the outset so as to give you the best opportunity for a favorable outcome. Call us at (617) 227-7423 for a free consultation about your claim.