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How will your personal injury settlement be taxed?

If you have suffered from a severe personal injury as a result of a car crash or other accident in Connecticut, you probably want to seek damages from the responsible party to pay for medical expenses, loss of income and other financial burdens arising from the incident. Before heading to court, however, it is a good idea to understand how the Internal Revenue Service may view any legal settlements.

According to Forbes, the IRS often considers settlements to constitute taxable income, but there are many factors that contribute to how you will be taxed. First, you may be relieved to learn that compensation for physical injuries and medical expenses are generally exempt from taxation. The IRS does specify that the injuries for which you are seeking compensation must be physical.

Emotional distress general does not qualify as a physical injury, and compensation for any related symptoms you suffer, such as headaches and ulcers, may not be exempt from taxation. It is possible that you could argue with the IRS in court about how such compensation should be taxed, but the odds of winning this fight are not in your favor.

Interestingly, though you may be taxed on remuneration for emotional distress, the costs of treatment for said distress fall into the “medical expenses” category and, therefore, also may be tax exempt. The IRS may consider compensation for psychologist visits and physical therapist appointments in the same light.

The IRS also considers punitive damages above and beyond compensation for personal injury to be fair game. In other words, the compensatory portion of your settlement may be tax-free, but the punitive portion is often taxable.  

Please note that this information is provided for informational purposes and is not intended to serve as expert legal advice.

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