If you were in a car accident as a result of someone else's fault and ended up breaking some bones along with other medical problems, you probably had to miss work and deal with significant pain and suffering. You go through doctor visits, physical therapy, imaging studies, some nightmares, counseling, and overall it amounts to a very stressful time.
Eventually your personal injury case reaches a settlement and all of your damages could reduce down to a financial amount. Are you then liable to pay taxes on that settlement money? It actually depends on whether or not the monies received in settlement are appropriated to the injuries sustained or for the economic benefit loss.
The basic premise is that if the monies are being received for the injury, it's not taxable. If it's for loss of economic benefit, it's included in gross income and is taxable. If you were losing wages while out of work and part of your settlement involves replacement of those amounts, you would need to pay taxes on those amounts (you would have anyway if you were still working). There has been some case law precedence, but it's not always clear cut. Also I am not an attorney so this is not legal advice!
There is a tax code in the IRS that handles certain payments for physical injuries and whether or not they're excluded from gross income. That IRS tax code is section 104 period the IRS does not make a clear-cut as they do not provide clear guidance on what the terms "physical sickness or physical injuries" exactly mean. However, if the compensation is being received solely for "physical sickness or physical injuries" then that total amount is what is supposed to be excluded from gross income and hence not taxable.
In the past the IRS has ruled on the case known as LTR 200041022. the case involved a woman who received a settlement from her foyer as it related to unwanted physical contact in the workplace. Since the settlement that was received was not based on physical injuries and there was no "observable bodily harm", the IRS ruled that her settlement monies had to be included in gross income and therefore taxable.
There was a case in the US Supreme Court regarding Section 104, Schleier v. Commissioner. The Court adopted a 2 step mandate that the cause of action needed to be a tort-type action and that the monies received were on account of sickness or personal physical injury.
Since there are no definitive definitions, those involved in the settlement should speak with an experienced tax attorney to clarify exactly what should be included in gross income versus excluded. At times personal injury settlements manned up and the millions of dollars, and if not calculated properly the IRS may get involved asking for money.
Eventually your personal injury case reaches a settlement and all of your damages could reduce down to a financial amount. Are you then liable to pay taxes on that settlement money? It actually depends on whether or not the monies received in settlement are appropriated to the injuries sustained or for the economic benefit loss.
The basic premise is that if the monies are being received for the injury, it's not taxable. If it's for loss of economic benefit, it's included in gross income and is taxable. If you were losing wages while out of work and part of your settlement involves replacement of those amounts, you would need to pay taxes on those amounts (you would have anyway if you were still working). There has been some case law precedence, but it's not always clear cut. Also I am not an attorney so this is not legal advice!
There is a tax code in the IRS that handles certain payments for physical injuries and whether or not they're excluded from gross income. That IRS tax code is section 104 period the IRS does not make a clear-cut as they do not provide clear guidance on what the terms "physical sickness or physical injuries" exactly mean. However, if the compensation is being received solely for "physical sickness or physical injuries" then that total amount is what is supposed to be excluded from gross income and hence not taxable.
In the past the IRS has ruled on the case known as LTR 200041022. the case involved a woman who received a settlement from her foyer as it related to unwanted physical contact in the workplace. Since the settlement that was received was not based on physical injuries and there was no "observable bodily harm", the IRS ruled that her settlement monies had to be included in gross income and therefore taxable.
There was a case in the US Supreme Court regarding Section 104, Schleier v. Commissioner. The Court adopted a 2 step mandate that the cause of action needed to be a tort-type action and that the monies received were on account of sickness or personal physical injury.
Since there are no definitive definitions, those involved in the settlement should speak with an experienced tax attorney to clarify exactly what should be included in gross income versus excluded. At times personal injury settlements manned up and the millions of dollars, and if not calculated properly the IRS may get involved asking for money.
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