Does someone that has received compensation as the result of a personal injury settlement have to report receipt of that same money, at tax time? The answer to that question depends on the circumstances surrounding the injury-causing event and the way that the award could affect the injured victim.
Settlement money is not taxable, if it was used to cover one of the following:
• Payment to an injury lawyer in Arcadia
• Expenses caused by injuries
• Losses caused by sickness
• Expenses caused by impairment
• Expenses caused by disability
• The victim that has received the settlement funds must still file a tax return.
• That return should contain the itemized deductions for each cost incurred, due to needed treatment.
• Medical costs could be included in the itemized deductions for multiple years, if the treatment program had continued for more than one year.
In most circumstances, settlement funds are not viewed as part of income.
Sometimes an accident victim might win delivery of settlement income in the future. In that case, it becomes the victim’s responsibility to itemize the deductions, and to list the non-taxable income from the settlement.
There are 2 times when settlement money is considered part of the victim’s income:
—Money to cover lost wages or earnings
—Money for increased stress
Taxability of funds for losses
The nature of the damage that caused the reported loss determines whether or not the person that suffered that same loss must pay taxes on any monetary reimbursement.
Reimbursement of lost wages should be listed as income on a tax form. The government taxes wages, regardless of the time when those same wages have come into the hands of the deserving employee.
For those victims that were self-employed, reimbursement of lost profits must be listed as income on the appropriate tax form. A business owner must report all of their profits to the government. Business owners pay taxes on their profits.
Rules about payments that cover damage to property
Did the size of the payment exceed the adjusted amount? If so, then that excess is taxable.
Was the victim able to invest any of the payment? If so, then the interest from the investment is taxable.
Payment offered for a loss of value is not taxable. Acquisition of an item that does not qualify as cash does not have to be mentioned on a tax form. That would include inherited items, such as antiques of jewelry. Those are not viewed as income.
Of course, the recipient of any such item could choose to sell it. The sale of that item would add to the income of the seller. For that reason, someone that is completing a tax form must list any additional income from any other sources.
