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Personal Injury Lawyer in Connecticut: Understanding Tax Implications of Settlements

Receiving a personal injury settlement or award is great news for anyone in Connecticut who has suffered a personal injury or wrongful death. This money is used to pay for expenses and help get your life back on track. A question commonly asked is whether a person has to pay taxes on a personal injury settlement. 

Attorney Jim Miron is an experienced personal injury lawyer with over three decades of experience in Connecticut who can help you understand any tax obligations when he successfully represents your personal injury or wrongful death claim. Contact Jim Miron at 203.339.5991 to schedule a free initial consultation about your personal injury claim and possible tax implications.

Taxes and Personal Injury Claims in Connecticut?

Settlements and judgments may have federal and state tax implications if the settlement or judgment is considered "Gross Income". 

Connecticut defines Gross income as all income you received in the form of money, goods, property, services not exempt from federal income tax.

The Internal Revenue's general rule regarding taxability of amounts received from settlement of lawsuits and other legal remedies is Internal Revenue Code (IRC) Section 61. This section states all income is taxable from whatever source derived, unless exempted by another section of the code.

Internal Revenue Code (IRC) Section 104 provides an exclusion from taxable income with respect to lawsuits, settlements and awards. However, the facts and circumstances surrounding each settlement payment must be considered to determine the purpose for which the money was received because not all amounts received from a settlement are exempt from taxes. The key question to ask is: "What was the settlement (and its corresponding payments) intended to replace?"

IRC Section and Treas. Regulation

IRC Section 61 explains that all amounts from any source are included in gross income unless a specific exception exists. For damages, the two most common exceptions are amounts paid for certain discrimination claims and amounts paid on account of physical injury.

IRC Section 104 explains that gross income does not include damages received on account of personal physical injuries and physical injuries.

IRC Section 104(a)(2) permits a taxpayer to exclude from gross income "the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or physical sickness

Reg. Section 1.104-1(c) defines damages received on account of personal physical injuries or physical sickness to mean an amount received (other than workers' compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution.

So, to summarize, the general rule specific to personal injury claims is that the proceeds for compensatory damages are not taxable under federal or state law. This rule applies whether the claim was settled prior to or after filing a lawsuit, or whether the proceeds were awarded in a verdict following a trial. 

The reason for the general rule is that compensation for compensatory damages is meant to essentially reimburse an individual for the losses suffered as a result of an injury. As such, any compensated gain is meant to offset the losses, so there is no net gain from the proceeds.

Non-Taxable Personal Injury Settlements or Judgments in Connecticut

Personal injury claims include several types of cases that could fall into the general rule of non-taxable settlement proceeds. Common types of non-taxable personal injury settlements include:

  • Motor vehicle accidents
  • Boating accidents
  • Animal bites and attacks
  • Slip and falls and other premises liability cases
  • Dangerous or defective products
  • Workplace accidents
  • Medical malpractice 
  • Dangerous or defective medications
  • Wrongful death 

Unfortunately, most personal injury claims include compensation for many types of damages, so taxability is not always a straightforward question.

Exceptions to the Rule on Taxing Personal Injury Claims in Connecticut

There are several exceptions to the general rule that can present many complexities in determining the taxable portions of the settlement proceeds. Failure to properly include taxable portions of a personal injury settlement could result in potentially severe tax penalties.

Punitive Damages and Interest Exceptions

In some cases, punitive damages are awarded to provide additional punishment for reckless or intentional behavior of the liable party and prevent similar conduct in the future. Compensation for punitive damages is awarded on top of compensatory damages, and as such, these proceeds are typically taxable.

Additionally, the interest earned on a verdict or settlement amount from a personal injury claim is generally taxable. Many states have court rules that provide interest on a personal injury settlement or verdict for the time the case was pending before the court.

For example, if a verdict awards compensation to an injured party one year after the lawsuit was filed, the injured party could receive interest on the verdict amount starting from filing date and running until the payment is made.

Other Common Exceptions to the General Rule

In some cases, an injured person might sustain emotional distress damages from an accident or incident. Emotional distress commonly results from an injury, such as anxiety or depression following a significant injury. However, it can also be unrelated to any injury, such as seeing a close loved one suffer harm.

If the emotional distress damages are connected to a physical injury or illness, any compensation is generally not taxable. If the damages are not connected to a physical injury or illness, the compensation is typically taxable.

Personal injury settlements also often include compensation for lost wages while an individual recovers from an injury. Unfortunately, this portion of a settlement is generally taxable as income, according to the Internal Revenue Service.

Contact a Personal Injury Lawyer in Connecticut Today

It is important to understand the breakdown of a personal injury settlement to ensure the proceeds are properly reported for tax purposes. Jim Miron's personal injury team in Connecticut will help you understand what is and is not taxable. Contact us either by filling out the online form or calling Jim Miron at  203.712.5580  today to schedule a free initial consultation to discuss your specific personal injury claim.

Contact Jim Miron Now!

After being seriously injured due to the fault of another you need sound, objective, and expert legal advice. Attorney Jim Miron believes that everyone deserves access to quality legal services and he is committed to answering people's questions and helping them.

Jim Miron offers everyone a free, no obligation, and confidential consultation. Contact Jim Miron today to schedule a telephone, videoconference or in person meeting. Our office follows all CDC and governmental regulations regarding COVID safety.