Personal injury settlements tend to be sizable. Even minor injuries can cost thousands to treat, and once you take into account lost wages, the damages can quickly amount to tens of thousands of dollars — or more. If you manage to secure a hefty settlement, it’s only natural to worry about an increased tax burden. Here’s what all claimants should know about tax preparation as it pertains to personal injury settlements.
Which Proceeds Aren’t Taxable?
In general, standard personal injury payouts are not taxable. As long as you don’t include medical expenses related to treating your injuries in any itemized deductions, the compensatory damages you recover should not increase your overall tax burden. Of course, hospital bills are not the only costs you will incur after sustaining serious injuries. Fortunately, any compensation for emotional distress, mental anguish, and pain and suffering is not typically taxable, either.
Which Proceeds Are Taxable?
It’s wise to consult with a tax preparation expert if you receive a personal injury payout because certain portions of the settlement — mainly, those that are not considered compensatory damages — may be taxable. For example, punitive awards must be listed as “Other Income” on your Form 1040. In the state of North Carolina, personal injury claimants are entitled to punitive damages when the liable party’s conduct constitutes malice, fraud, or willful negligence.
If you received a personal injury settlement and need help with tax preparation, contact Sharrard, McGee and Co., PA. Founded in 1976 in High Point, NC, they opened a second office in Greensboro more than 20 years ago, and have been serving clients out of both ever since. Their areas of expertise include both individual tax preparation and corporate accounting. Whether you own a small business and need help with QuickBooks® or are facing an audit, you can count on them for prompt, reliable service. To learn more about these and other offerings, visit their website. To speak to a tax preparation expert in High Point, call (336) 884-0410. For the Greensboro location, call (336) 272-9777.