If you were injured in a Personal Injury Settlements due to someone’s intentional or negligent wrongful act, you can file for compensation. Alaska’s personal injury law allows you to receive payment for monetary damages in court or out of court.
You may wonder if you have to pay taxes from the compensation you receive, especially since you pay taxes on your income. This article sheds more light on the question and explains taxing rules when it comes to personal injury compensation.
Does the Federal Government Tax Personal Injury Settlements?
Personal injury settlements are not taxable on the federal level, meaning your compensatory awards are safe from the IRS. Considering that the funds you receive are meant to compensate for your losses, the federal government does not take from it. This stands true for economic damages for lost wages and medical bills as well as noneconomic damages for pain and suffering.
However, note that compensation for emotional distress and pain and suffering are not taxable only when physical injury is involved. For example, if a dog attack gave you PTSD but you did not sustain physical injuries, your compensation award will be taxed.
Why Are They Not Taxed?
Economic damages are not taxed because they are meant to assist you in recuperating from lost wages. Noneconomic damages are not taxed because they are meant to make you whole for losses for which you cannot be directly compensated.
Does the State Government Tax Personal Injury Settlements?
Most states, including Alaska, do not tax personal injury settlements as they believe it is intended to compensate you for losses. In Alaska, your personal injury settlements are not considered an income or a windfall but a recompense for the harm you endured.
Are Medical Expenses Taxable?
The rules are a little more complicated for medical expenses, especially if you took an itemized deduction for medical bills. More so because, in certain situations, you might need to declare some of the income from the settlement.
For example, if you claimed a tax deduction for medical expenses and then you received compensation for them. The law requires you to declare income from the settlement meant to compensate you for the expenses you took a deduction from. This is especially so if you got a tax benefit from the deduction.
Are There Taxes On Punitive Damages?
While most personal injury compensation awards are not taxable, punitive damages are exempted as they are not often awarded. Also, punitive damages are awarded to punish defendants rather than compensate plaintiffs or victims.
Thus, the money is not expected to make you whole from prior losses and, as such, can be taxed. However, if the punitive damages were for wrongful death, especially when there is a provision for only punitive damages, there are no taxes.
Are There Taxes On Wrongful Death Damages?
If the case involves wrongful death, no tax will be placed on both personal injury and wrongful death damages in most cases. In such cases, the plaintiff died, and their surviving relatives claim to recover compensation for lost wages and medical bills, among others. Therefore, since the damages awarded are meant to help the deceased’s surviving loved one to make them whole, they are not taxable.
Conclusion
“Generally, the taxing rules for damages awarded from personal injury cases differ from state to state based on certain peculiarities,” says attorney Daniel Libbey. Therefore, if you are unsure as to whether or not your compensation is taxable, you should find out. An Alaskan personal injury lawyer can help you understand your tax obligations and maximize your settlement award.