Is My Personal Injury Settlement Taxable in Tennessee?
Picture this: After sustaining a severe injury in an accident that was not your fault, you’ve waged an intense legal battle that may have taken months or even years to resolve. But you’ve finally prevailed and recovered compensation for your injuries. What’s your next step?
Before you start to use the money you receive in a personal injury settlement, you need to consider all the financial implications of the settlement. For instance, you may have to pay taxes on your settlement, which could have a major impact on your financial future. Failure to pay these taxes could result in significant penalties, setting you back just when you’re ready to get your life back on track after an injury.
To make sure you don’t get into any tax trouble after receiving a personal injury settlement, you’ll want to get help from an experienced lawyer. The team at Davis Firm, LLC, has decades of experience helping people just like you get the most from their personal injury settlements. We’ve tried more than 200 cases in court and have helped many more clients get full compensation for their injuries. Founder Scott Davis previously served in the military, giving him a strong sense of duty and service that he’s carried over into our legal practice.
No matter where you are in your personal injury case, we can help make sure your rights are upheld. Get your free initial consultation today by calling our office or visiting our contact page.
Are Personal Injury Settlements Taxed in Tennessee?
Tennessee does not have a state income tax, so any money you receive from a personal injury settlement will not be taxed by the state. It’s a different story for federal income taxes, however.
While it may seem unfair to have your personal injury settlement taxed after all you’ve been through, federal tax laws and IRS regulations may mean that you have to pay some amount of taxes on your settlement. That said, not all money you receive from a personal injury settlement can be taxed, so you still stand to gain a significant amount once you start to receive compensation.
The amount of money that can be taxed in a personal injury settlement will vary from case to case. Certain kinds of income from a personal injury settlement are taxable, while others are not. Depending on how your settlement is structured, including whether or not you collect all the money in a lump sum, you could face fairly significant taxes or low taxes.
To make sure you get the most amount of compensation possible while still following all necessary tax requirements, talk to an experienced personal injury attorney. A lawyer can help set up your settlement in a way that maximizes your potential income while ensuring that you still pay your necessary taxes.
What Can and Cannot be Taxed After a Settlement?
A personal injury settlement generally breaks down into several different categories of compensation. What can or cannot be taxed in a settlement depends on the category in question. Broadly speaking, it breaks down like this:
- Compensation for physical injuries – Most compensation related to the physical injuries you sustained is not taxable. This means the money you receive to cover the cost of your medical bills — doctors’ office visits, hospital stays, surgeries, prescription medications, physical therapy, transportation to and from appointments, etc. — will not be taxed. Other compensation you receive that’s directly related to a physical injury will also generally not be taxed. This includes compensation for things like your physical pain and suffering, mental anguish related to physical injuries, and loss of consortium (meaning the loss of emotional support from a family member).
- Compensation for lost wages – Another major category of compensation in personal injury settlements is money to cover any wages you lost while you were healing from your injuries. While compensation for lost wages is taxable in some kinds of lawsuits, such as discrimination cases or breach-of-contract suits, it is not taxable in personal injury cases. You can keep any money you receive for your lost wages in a personal injury case.
- Compensation for emotional harm without a physical injury – Depending on the particulars of your personal injury case, you may receive compensation for emotional harm that’s unrelated to any physical injury. If this is the case, this income likely would be taxable.
- Punitive damages – Punitive damages are additional compensation awarded to punish the defendant for their negligent actions and to deter others from engaging in similar behavior. These damages are usually reserved for the most egregious cases, often dealing with a defendant’s intentional, reckless, or grossly negligent behavior. Because punitive damages are not related to any specific physical injury, this compensation is generally taxable when you receive a settlement.
- Interest on your personal injury settlement/judgment – It can sometimes take a while for you to receive your full settlement after you’ve won your personal injury case. When this happens, interest may accrue, and that interest is taxable. It’s important to know that interest can sometimes begin adding up from the time you file your case until the date that your settlement is fully paid, and you’ll need to make sure you pay the proper taxes on that interest for the entire duration.
These are general guidelines, and you want to get professional help with your taxes to make sure you don’t run into any issues. Your personal injury lawyer and a knowledgeable tax preparer can go through your settlement to make sure you pay your taxes where required while keeping as much money as possible.
Do I Need to Report My Settlement to the IRS?
While not all of your income from a personal injury settlement is taxable, some portions of it likely are. Any compensation from a personal injury that is taxable should be reported to the IRS. This includes any punitive damages you receive in a settlement, any interest on your settlement, and any compensation for emotional harm that isn’t related to a physical injury.
However, you do not necessarily have to report all of your income from a settlement to the IRS. To make sure you do not get into any legal trouble, your best bet is to tell your tax preparer about all the money you’ve received from your settlement. That way, they can make sure you meet any reporting requirements and you pay the appropriate taxes on that income.
The best way to minimize your tax liability for a personal injury settlement is to work with an experienced attorney throughout your case. A skilled, knowledgeable personal injury lawyer will fight to get you the maximum amount of compensation for your losses. Once you’ve secured your compensation, an attorney can also help you structure your settlement in such a way as to minimize the amount you will lose in paying taxes.
Contact a Chattanooga Personal Injury Lawyer If You’ve Been Injured
While it would be preferable if you didn’t have to worry about taxes after a grinding legal battle to obtain a personal injury settlement, it’s an important element of your case to consider. You don’t want to run the risk of not paying your required taxes and then getting into trouble with the IRS. To make sure you get the money you need for your injuries while maximizing the compensation you keep, talk to the personal injury team at Davis Firm, LLC in Chattanooga, today.
Our history, values, and commitment to our clients are what set us apart from our peers. Founding attorney Scott Davis’ time in the U.S. Air Force taught him the importance of service to others as well as the value of integrity and hard work. After he completed his military service, Davis worked as an attorney for insurance companies, giving him valuable insight into how these entities operate and the tactics they use to shift blame for accidents. Davis has taken that experience and uses it to help accident victims get the care and the compensation they need for their injuries.
When you hire our firm, you get a team that’s fully committed to bringing your case to a positive conclusion. We’re available at all hours of the day to answer any questions you may have, and we’ll be sure to keep you fully informed at every step along the way.
We also want to be sure that anyone who needs quality legal representation can afford it. That’s why we work on a contingency fee model. If we take your case, you don’t need to pay us any fees unless we collect compensation on your behalf. This approach makes it so anyone who needs a lawyer can afford one, even with limited financial resources.
No matter where you are in your personal injury case, we would be honored to help you however we can. To learn more about our legal services, get a free case review by calling our office or visiting our contact page.