Some people receive their personal injury award in a lump sum amount, and others receive it in the form of structured settlement annuity payments paid over time. Both can drastically increase the total amount of income you receive annually, and you may be wondering if you need to pay income taxes on your personal injury settlement award. In some cases, you may need to pay taxes on this money. However, there are many instances when the money is earned tax-free. You want to avoid paying unnecessary taxes to the IRS, so it is important to learn more about the instances when you do not have to pay tax on this money.
Money Paid for Injuries
If you received any money from a Toronto personal injury lawyer law case that reimburses you for injuries you suffered, this money is usually considered to be tax-free. This includes medical reimbursements as well as money that you received for pain and suffering. Typically, the court awards the money so that it is broken down by the amount received for various factors. The caveat here, however, is if you claimed a tax deduction for medical expenses. If you claim a tax deduction for medical expenses related to the accident, or if you claimed a deduction for these expenses in a prior year, you will need to pay taxes on the portion of your award that was allotted for medical expenses, pain and suffering.
Money Paid for Lost Wages
While you normally would pay federal income taxes on money that you earn from a job, the good news is that you do not need to pay income taxes on a reimbursement for lost wages through a personal injury lawsuit. This can help you to keep more of your much-needed cash in your pocket.
Money Paid to Legal Fees
The tax law related to legal fees on a personal injury case is not so easy to understand. Generally, the portion of the fees that you paid on an award that is tax-free is not tax deductible. On the other hand, the portion of the fees that you paid on an award that is taxed is tax deductible. It can be difficult for an average individual with no education on accounting and tax law to differentiate these figures. Therefore, it is often wise to seek advice from an accountant before filing your return.
If you have received any income from a civil lawsuit in the last year, you may be required to pay federal income tax on the amount awarded to you. If you have any questions on the taxable amount, it is best to seek financial advice from a tax professional.