When a person is injured in an accident, he or she may pursue legal action to recover the costs of medical treatment. These lawsuits are useful mechanisms for individuals needing to cover high medical costs, especially due to the rising costs of healthcare. Technically speaking, this money counts as income, meaning that it becomes a consideration for federal taxes. However, due to the purpose of these funds, they are not treated in the same way as other forms of income.
According to the federal tax code, the government will not tax any personal injury funds resulting from an injury claim. This can include compensation received for physical injury, medical expenses, emotional damages, and even lost wages. In the case of lost wages, compensation will prove non-taxable while the actual wages themselves would have been regularly taxed.
Some individuals may attempt to use the medical expense deduction when filing for their income tax return. However, if the funds were received without tax as a part of a settlement or judgment, this deduction must be adjusted by filing these funds as income in the tax return.
There is one instance when this money becomes taxable. If a person is injured in an accident and receives a sum of interest as a part of the settlement total, that additional income is considered a separate taxable entity from the actual compensation sum. As a result, any money received through interest, not the compensations funds themselves, will be considered taxable income by the IRS.
To learn more about tax statuses with car accident injury claim funds, contact an auto accident lawyer.
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