No, you do not have to pay taxes on a settlement reward from a lawsuit. The general rule for taxability on settlements received can be found in Internal Revenue Code (IRC) Section 61. This section states all income is taxable unless it is listed as an exemption. IRC Section 104 provides a taxable exclusion with respect to lawsuits, settlements, and rewards.
Do I Have to Pay Taxes for Past and Future Medical Expenses for a Home Depot Slip-and-Fall Settlement?
Under 26 U.S. Code 104 (a)(2), the compensation you receive for your medical expenses for your physical injuries does not count as your gross income and is not taxable by the IRS or the State of California. Damages for your past and future medical expenses are not considered taxable income as they are considered to be monetary reimbursements for the money you were forced to spend to receive treatment for your injuries.
However, when filing your taxes, if you claimed itemized deductions for some of your medical expenses while your lawsuit was pending, you will have to include those deduction amounts and report them to the IRS. This rule is covered in the subsection of 26 U.S. Code 104(a), which states that any medical expenses you claimed as itemized deductions during the year you received your settlement or reward cannot be later exempt from your gross income.
So, if you only received the standardized deduction and did not itemize your medical expenses, then none of your medical expenses will be taxable.
Exceptions to Tax-Free Settlements
If you’re rewarded punitive damages, that portion of your recovery can be taxed. Punitive damages are awarded to accident victims who were harmed intentionally or due to an extreme case of recklessness. This would be extremely rare in a Home Depot personal injury case, but it can happen. An example of this would be if Home Depot knew about a broken ceiling fixture, were warned about it, and yet continued to do nothing about it until it fell and seriously injured a customer.
Another exception to receiving a tax-free settlement is if you receive interest on your award. Interest can accrue while a settlement goes unpaid. Generally, an unpaid principal balance collects 10% or 7% if the debtor owes $200,000 or more or if they’re a government entity, but will not exceed 15%.
Confidentiality Clauses and Settlement Taxation
The confidentiality clause of a settlement agreement may result in unintended taxable income. The reason for this is that tax law states that personal injury settlements are untaxable when they cover personal injury and emotional damage. This law is unenforceable if a personal injury case contains a confidentiality clause.
A confidentiality clause is a contract provision that prevents parties from sharing sensitive information with third parties without permission, also known as a non-disclosure agreement (NDA). So, if your personal injury case settles with a confidentiality clause, the IRS could say your settlement is taxable because it was for confidentiality, and not for personal injury reasons such as medical bills, lost wages, and emotional damages.
What Impacts the Settlement Value of a Personal Injury?
Several key factors significantly influence the average settlement in personal injury accident cases:
- Liability: the degree to which the defendant is found responsible for your injury can add value to your settlement. The more reckless the defendant’s actions usually result in a higher settlement.
- Insurance coverage: the defendant’s insurance policy limits can cap the maximum settlement amount. If the defendant has an insufficient insurance policy, then alternate means of compensation will have to be pursued.
- Contributory negligence: Oklahoma is a modified comparative negligence state, meaning if you (the plaintiff) are found less than 50% at fault for your injury, then you can receive compensation for your damages.
- Nature and extent of Injury: the cost of all reasonably necessary medical treatment and the estimated cost of future medical treatment are essential to the value of a case.
- Objective findings for physical pain: pain is a subjective thing, so, objective evidence is needed to support it in a personal injury case. This is usually presented in the form of X-rays and MRIs.
- Medical history: a history of preexisting injuries or degenerative conditions can reduce the case’s value. Insurance companies often argue that the injury resulted from preexisting issues rather than the incident itself.
- Plaintiff’s Age: this factor ties closely to medical history. Since health problems are often associated with aging, younger plaintiffs generally fare better in personal injury cases. It’s easier for a younger person to convince a jury or insurance adjuster that their bodies were fine before the accident.
- Permanent impairment: the most critical factor in a personal injury settlement is whether the injury results in permanent impairment. A permanent disability, especially one that affects the plaintiff’s ability to walk, can drastically impact their quality of life. As a result, compensation for a permanent injury is typically much higher than for an injury that heals.
Contact a Home Depot Slip-and-Fall Lawyer
If you or your loved one has suffered a slip-and-fall injury at Home Depot, Maison Law can help you reach a successful settlement. We have years of experience in managing personal injury cases for our clients and our firm has the legal resources to achieve a favorable outcome on your behalf against Home Depot. Contact Maison Law today for a no-cost, no-obligation consultation.
