With tax season in full swing, you may be wondering how your personal injury settlement impacts your tax liability. Whether you must include the settlement proceeds in your income depends on all the facts and circumstances in your case.
The portion of the settlement attributed to the physical injury/sickness you do not need to include as income as long as you did not take an itemized deduction for those medical expenses in prior years.
If your settlement includes emotional distress or mental anguish then whether you include them as income depends on whether they originated from the physical injury or sickness. If the emotional distress originated from the physical injury then you do not need to include that portion as income. If they did not then you do need to include it as ‘other income’.
Property settlements for loss in value of property that are less than the adjusted basis of your property are not taxable and generally do not need to be reported on your tax return.
Punitive damages are taxable and should be reported as “Other Income” on line 21 of Form 1040, even if the punitive damages were received in a settlement for personal physical injuries or physical sickness.
Contact AJ Law Practice for all your injury related questions.