Insurance Settlements and Taxes

If you have an insurance settlement coming your way, you may be wondering what the tax ramifications might be. While it is true that most forms of income are taxable under state and federal law, insurance settlements are a little different. Whether or not your settlement proceeds need to be included in your income when filing your tax return will depend on a few factors, mainly how your settlement funds are allocated.

Some settlement funds, or damages awarded in a court case, that compensate you for your losses are not considered income for tax purposes. If your settlement funds were allocated to physical sickness and injuries, you do not need to include those funds in your income. If you deducted the medical expenses you incurred as a result of your injury in any prior tax year, however, you do need to include the portion of the settlement funds that you already wrote off in previous tax years. For example, if you incurred $5,000 in medical expenses while your case was pending, and wrote those expenses off in that tax year, you will have to include $5,000 of your settlement proceeds in your taxable income in the current year. You should report this as “other income” in your tax return.

If a portion of your settlement was allocated to emotional distress or mental anguish not originating from a physical sickness or injury, you will have to include that portion in your income in your tax return. You may still deduct your medical expenses related to this emotional distress or mental anguish in your tax return. Again, report these proceeds as “other income”. Settlement funds allocated to emotional distress or mental anguish that did originate from a physical sickness or injury do not need to be included in your income. These proceeds are typically included in what is called your pain and suffering.

On rare occasions, a plaintiff may be awarded punitive damages as part of a court case. These are awarded along with compensatory damages, which compensate you for your losses, but they are designated separately. Punitive damages serve to punish the defendant for particularly reckless or damaging behavior, rather than compensate you for any loss sustained. For this reason, they are considered taxable income to the plaintiff and should be reported as “other income” on your tax return. Also, if you earned any interest on any of your settlement funds, you must report that interest on your tax return as “interest income”.

If you have questions about the tax ramifications of your settlement, Thomas C. Rowsey, P.C. can advise you on your rights and obligations at settlement. Experienced in personal injury law, attorney Thomas C. Rowsey, P.C. serves those across the greater Atlanta metropolitan area who need assistance in handling their personal injury claims. Based in Roswell, GA, Thomas C. Rowsey Attorneys at Law serves those across the greater Atlanta metropolitan area including Roswell, Alpharetta, Marietta, Milton, Cumming, Dunwoody, Johns Creek and Sandy Springs. Contact our office today at (770) 993-5317 or fill out our online form to schedule a free consultation. Offering expert legal counsel in personal injury, criminal defense and family law, Thomas Rowsey, Attorneys at Law are here to help.