Getting a settlement for expenses related to a personal injury incident is a major financial relief for injury victims. If you find yourself in this situation, you may be wondering if all the money you receive from your personal injury claim is yours to keep. Or you may be curious to know if you’ll need to pay taxes on your settlement money as income.
In Illinois, the money you receive from a personal injury case is generally not considered taxable. This is because settlement money is not considered part of a claimant’s income. Rather, the money you receive for expenses related to bodily injuries and property damage is considered compensation for a loss. However, there are some exceptions. Certain portions of a personal injury settlement may be subject to taxes.
If you have specific questions about your personal injury settlement, you should consult your personal injury attorney or accountant to understand how the law applies to your specific circumstances.
Below is some general information about how personal injury settlements and verdicts affect income taxes.
Do I have to pay Illinois state taxes on my personal injury settlement?
Illinois follows federal guidelines when it comes to taxing personal injury settlements. If the settlement is exempt from federal income tax, it will also be exempt from Illinois state income taxes.
What portion of my settlement is tax-free?
If a personal injury settlement provides compensation for physical injuries or illness, then that portion of the settlement is not taxable. This is because it’s not considered earned income.
Compensation for physical injuries or illness usually remedies damages related to medical expenses. This may include damages for the cost of medication, surgeries, diagnostic tests, hospitalization, doctor appointments, rehabilitation, and other medical issues.
If you also got compensation for emotional distress that stemmed from the physical injuries, that portion is not taxable either.
Additionally, replacement services that were caused by your physical injuries are also not taxable. For instance, if a broken leg prevented you from driving to work, the compensation you received for alternative transportation would not be taxed.
Is compensation for property damage considered taxable?
Following an event like a car accident, you may have had to pay for repairs. If you received reimbursement for those repairs, it’s considered compensation for a loss and is therefore not taxable.
Is a wrongful death settlement considered taxable?
Generally, survivors who receive compensation for the death of a loved one do not have to pay taxes on that money.
For example, funeral expenses that stemmed from a wrongful death are considered compensation for a loss. As such, they aren’t taxable. This would also apply to compensation you receive in a wrongful death lawsuit for your loved one’s medical expenses prior to their passing.
What portion of my settlement is taxable?
Illinois follows the federal rules on taxes for personal injury settlements. Therefore, we can look to those laws to determine what portion of an injury claim settlement may be considered taxable.
Internal Revenue Code section 104(a)(2) excludes as income “the amount of any damages (other than punitive damages) received…on account of personal physical injuries or physical sickness.”
This clearly states that any money awarded for punitive damages (which is rare) is considered taxable.
Additionally, any compensation you receive for lost income is taxable since the wages you would’ve earned would have been taxable.
Additional Exceptions Where Settlements May be Taxable
Sometimes, settlement payments are delayed. This can cause your settlement amount to accrue interest while you’re waiting for your check. In this situation, the original amount is not taxable. However, any interest that accumulates on your settlement principal amount would generally be taxable.
Also, if you have already deducted your medical expenses in a previous tax year, you may have to pay taxes on the compensation you receive to replace those costs.
Can confidentiality clauses affect what is taxable?
In some cases, an injury victim is offered additional compensation in exchange for confidentiality. This is common when the at-fault party is a well-known public figure or a business with a reputation to protect. Compensation for confidentiality is unrelated to the physical injury itself and is therefore taxable.
If you are ever involved in this kind of case, make sure the terms are clear. If you are receiving money in excess of your damages to agree to confidentiality, it’s important that the settlement agreement breaks down amounts. This way you’ll know how much of your settlement was for confidentiality and how much was for physical injuries. This would allow you to then differentiate between taxable and non-taxable sums of your settlement.
If you are signing a confidentiality agreement but not being paid anything extra for it, make sure the agreement states that there is no consideration being paid because of the confidentiality clause. If the agreement does not clarify this, the settlement money may be considered taxable.
Admittedly, this type of settlement agreement is complicated. That’s why having a qualified personal injury attorney guiding you through the personal injury claim process is the best way to secure fair compensation for your injuries. Moreover, it helps you establish settlement terms that ensure your taxable portion is clear and distinct from the non-taxable portion.
How can I limit taxes on my settlement amount?
Some Illinois personal injury settlements include both taxable and non-taxable forms of compensation. If a case is resolved in court, a jury will specify how much of a settlement is for physical injuries.
However, most personal injury claims are settled before they reach a courtroom. In these situations, the insurance company may not provide a breakdown of the settlement unless you specifically request it.
It’s in your best interest to have in writing what part of the settlement is for your physical injuries and what part is for other damages. This needs to be detailed in your settlement agreement.
An experienced lawyer can help you to make sure that the settlement agreement clearly expresses which specific amounts relate to each type of damages.
Getting the Highest Possible Settlement for Your Personal Injury Claim
If you’ve been injured due to someone else’s negligence, the attorneys of Abels & Annes can help you to get maximum compensation for your injury claim. Our no-obligation initial consultations are always free. To learn about the potential legal options available to you, call us at 312-924-7575 or contact us online.