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Hurt in an accident in South Carolina? If your injury was caused by the negligence of another party, you have the right to seek compensation through a personal injury claim. A settlement can include a wide range of damages—from medical bills to lost wages to pain and suffering. This raises an important question: Do you pay taxes on personal injury settlements? The answer is generally “no”—with limited exceptions, personal injury settlements are not taxable income. Here, our Lancaster personal injury lawyers provide a comprehensive guide to the tax implications of a personal injury settlement.
Personal Injury Settlement Taxable? (Generally No)
As a general rule, you will not have to pay taxes on your personal injury settlement. As explained by the Internal Revenue Service (IRS), “gross income does not include damages received on account of personal physical injuries and physical injuries.” You can get your settlement without being worried that you are going to have to cut a big check to the IRS. The official regulation for taxes and personal injury compensation is IRC Section 104.
The reason for this is that a personal injury settlement is designed to be “compensatory” in nature. In other words, the value of your personal injury case is based on damages that you suffered as a consequence of your accident—medical bills, wage loss, pain and suffering, etc. Personal injury compensation is meant to make you “whole” and put you back in the position that you would have been in had no accident ever happened.
Note: The same principles apply under South Carolina law. A personal injury settlement is generally not subject to state-based taxes in South Carolina.
The Exceptions: Injury Settlement Taxable
As noted, a personal injury settlement is (presumptively) not taxable income in South Carolina. You will not get taxed on your compensation for medical bills, lost wages, pain and suffering, and most other types of damages. With that being said, there are some limited exceptions to the rule. Here are the three big exceptions to the rule:
1. Emotional Distress, No Physical Injury: Compensation for emotional distress is not taxable because emotional distress is tied to a physical injury. However, when a tort settlement includes compensation for emotional distress or mental anguish without a related physical injury, it becomes taxable income. Indeed, the IRS views these settlements as income and it requires them to be reported as such. You must tie emotional distress to an actual physical injury or physical sickness for that specific income to be tax-exempt. To be clear, not many settlements are paid out for emotional distress without a physical injury—but it does sometimes occur. You need to be ready for the tax consequences.
2. Interest Accrued on Settlement: Any interest earned in any context is considered to be taxable income under federal regulations. Personal injury settlements are no exception to this rule. In some cases, it can take time for a claim to be processed. Interests—potentially a significant amount of interest in today’s higher interest rate environment—can start to add up. Interest that accrues on a personal injury settlement is considered taxable by the IRS. To be clear. The rule applies regardless of the nature of the underlying settlement. For instance, even if the principal amount of the settlement is non-taxable because it relates to physical injury, any interest earned on that amount from the time the claim was made until the settlement is received is taxable. It should be reported as “Interest Income” on your taxes.
3. Punitive Damages: In some limited cases, an injured victim may be entitled to compensation for punitive damages as part of their personal injury settlement. Punitive damages are taxable income. Punitive damages are awarded to punish the defendant for their conduct, rather than to compensate the plaintiff for loss or injury. Because they are not tied directly to personal physical injuries or sickness, the IRS classifies punitive damages as taxable income.
You Should Report Your Personal Injury Settlement to the IRS (Even Without Tax Obligation)
You are probably not going to have any federal or state tax liability associated with your personal injury settlement. With that being said, the IRS still wants to know about your settlement. Reporting it ensures transparency and compliance with the IRS regulations. By ensuring your settlement income is properly reported, you can avoid any tax problems with the IRS.
Injured Victims Deserve the Maximum Compensation
In South Carolina, injured victims have the right to seek compensation for the full scope of their damages—including their non-economic losses. How much can you expect to recover through a claim? The answer depends on several different case-specific factors. Our South Carolina personal injury lawyers are here to help you fight to maximize your financial recovery, including for:
- Property loss;
- Emergency room care;
- Medical expenses;
- Physical therapy;
- Loss of wages;
- Diminished earning power;
- Pain and suffering;
- Long-term disability;
- Loss of quality of life; and
- Wrongful death damages.
Why Rely On the South Carolina Personal Injury Lawyers at Schiller & Hamilton
Personal injury claims are complicated. Many technical issues can arise—taxes are just one example. At Schiller & Hamilton, we are devoted to protecting the rights and rights of injured victims. Not only will our Lancaster personal injury lawyers fight tirelessly to maximize your compensation, but we will also ensure that your settlement is properly structured to minimize tax liability. Initial consultations are always free and confidential.
Schedule a Free Consultation With Our Lancaster Personal Injury Lawyer Today
At Schiller & Hamilton, our Lancaster personal injury attorney is an experienced, solutions-focused advocate for injured victims. If you have any specific questions or concerns about personal injury settlements, we are here to help. Contact us right away to set up a free, no-obligation initial consultation.