What is the federal taxability of Personal Injury Award in Massachusetts and Across the United States?
We all know the general rule which is set forth in section 61: (a) General definition. “Except as otherwise provided in this subtitle, gross income means all income from whatever source derived …” 26 United States Code [Internal Revenue Code] § 61
Thankfully, the Internal Revenue Service generally excludes personal injury settlements, such as injuries resulting from car accidents, from taxable income.
When your negligence or injury case is close to settlement, it is important that you discuss the taxability of the settlement award with you MA Injury Lawyer. Injury awards and settlement proceed in MA for pain and suffering, sickness, scarring and physical injury should not be included in your taxable income. This includes awards for wrongful death as a result of a fatal accident such as a deadly premises liability claim or a bicycle accident.
“Payments received as compensation for physical injury or physical sickness are federal-income-tax-free. It doesn’t matter if the compensation is from a court-ordered award or an out-of-court settlement, and it makes no difference if it is paid in a lump sum or installments.” Source
Proceeds of an award, judgment or settlement in Mass. and across the United States for mental anguish, psychological injury and emotional distress in any type of accident (i.e. car, motorcycle or truck crash) are also not taxable income. There is an exception “if the proceeds for “emotional distress” or mental anguish “do not originate from a personal physical injury or physical sickness and those types of awards or settlement are includible as income with certain reductions.” http://www.irs.gov/pub/irs-pdf/p4345.pdf
Amounts paid on account of injury in personal injury cases such as pedestrian accidents, bicycle accidents and motor vehicle accidents are also not taxable income. “Oddly enough, amounts paid for lost wages are also tax-free, even though the wages would have been taxable if you had received them.” Source
Settlements or judgments for lost wages in “employment- related lawsuits” such as “unlawful discrimination” or “involuntary termination” are taxable income per IRS Guidelines http://www.irs.gov/pub/irs-pdf/p4345.pdf
Workers compensation awards in Massachusetts and nationally are not “taxable income” subject to certain exceptions.
Why are punitive damages generally taxable? “Punitive damages are intended to punish the wrongdoer and do not compensate the claimant for lost wages or pain and suffering. Thus, they are a windfall to the taxpayer and appropriately should be included in taxable income.” House Rpt 104-586 to accompany H.R. 3448, Small Business Job Protection Act of 1996
Interest on Injury and Motor vehicle Collision settlements: In most instances interest accumulated on a Massachusetts personal injury claim such as a slip and fall cause of action or a motorcycle collision is taxable as “Interest Income”
In most instances punitive damages are taxable income. “Although punitive damages are usually taxable, depending on the state law, they may be exempt from income in a wrongful death claim.” http://www.avvo.com/legal-guides/ugc/taxation-of-wrongful-death-settlement-proceeds-1
Since I am not a tax attorney or a CPA, I strongly suggest that you retain an accountant or CPA to determine whether you should report certain settlements or judgments as a result of a deadly accident, auto accident or other injury award. You should not 100 percent rely on your Mass. Personal Injury Attorneys’ tax assessment since he or she is likely not an accountant or CPA.