A personal injury settlement may help you pay living expenses, cover medical costs and make up for lost wages or lost future earnings. While the money may make it easier to live after getting hurt, it is important to understand potential tax and other implications of receiving that cash. Let’s look at some key items to understand after obtaining a settlement in a personal injury case.
1. What Your Settlement Covers
A personal injury settlement may help you pay medical bills incurred before the settlement was reached in addition to potential future bills. For instance, if you have to take medication or get physical therapy for the rest of your life, your settlement should cover those costs. Your settlement may also provide you with compensation for lost wages and lost future earnings. Your personal injury lawyer might also seek damages related to emotional distress, in addition to compensation for physical pain and suffering. Work with an experienced attorney such as the lawyer locals turn to.
2. The Money Might Be Taxable Income
In most cases, the money that you receive in a settlement is considered compensatory in nature. Compensatory income is generally not subject to income taxes. However, you may be required to reimburse the IRS for any tax deductions that you claimed for paying your own medical expenses before the settlement was reached.
Punitive damages are generally awarded to send a message to companies or government agencies that engaging in negligent or reckless behavior will not be tolerated. These funds are generally subject to income tax and reported on your federal return as other income. An estate planning lawyer or tax adviser may be able to determine what part of your settlement will be taxable on the federal or state level.
3. Outstanding Balances May Need To Be Paid Off
Your lawyers may need to be paid before you see any settlement money. Outstanding medical bills and other expenses incurred after an accident may also need to be taken care of prior to receiving any settlement funds. If you received public services after your accident, it may be necessary to repay some or all of that money back to the government after a settlement is reached.
4. Funds Might Not Be Available Immediately
Once a case has been settled, you may be required to sign a release form that is crafted by your attorney. It may also need to be signed by opposing counsel or other parties involved in the case. The process of creating the release form and signing it could take days or weeks. Your personal injury attorney and other parties who have placed a lien against your settlement may need to verify that they have been paid, and this could also take weeks or months to occur.
5. The Money Could Be Divided in a Divorce
The money that you receive may be labeled as marital property. As such, it could be divided in a divorce proceeding. A divorce lawyer may be able to explain the difference between marital and separate property and any steps that may be taken to protect settlement proceeds from being given to a spouse.
If you are going to be receiving a personal injury settlement in the near future, it is good to know when to expect the money and how you will receive it. Your attorney will likely provide more details about what your specific settlement will compensate you for, how much of it is taxable and how long it will take to release the funds.