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Do You Pay Taxes on Personal Injury Settlements in Hawaii?

Posted on by Olson & Sons

For the most part, you will not pay taxes on your personal injury settlements in Hawaii. That being said, there are circumstances where your settlement could leave you with some form of tax obligation. In some cases, it is possible to avoid these obligations through careful tax planning.

The best way to ensure you do not overpay for taxes on your personal injury settlement is by working with a seasoned attorney. The right legal counsel could help you not only secure fair compensation for your injuries, but also to understand how it might impact your tax bill as well.

Generally The Compensation For Personal Injury Settlements Are Not Taxable

For the most part, anything receive from an insurance company or defendant as part of a personal injury settlement will not be treated as taxable income by the government. It makes no difference if you resolve your case early on in the process, or if a settlement is reached after a lawsuit has been filed.

The prevailing rule when it comes to both state and federal taxes is that your settlement will not be taxed if it is compensation for a physical injury. This is true for both negotiated settlements and trial verdicts. If you are recovering compensation based on your physical injuries or illnesses, it is not considered income by either the state or federal government.

The reason your settlement is not taxable income is because personal injury settlements are designed to make you financially whole following an accident. If the government keeps a portion of your settlement, you are still not made whole. For that reason, you will generally not be required to pay taxes on the compensation you secure for your medical bills, lost wages, loss of consortium, or other damages.

Exceptions Can Always Apply in Hawaii

Just like with most things, there are some exceptions to be aware of regarding this general rule. For example, although your negligence claim proceeds might not be taxable, any damages you recover based on a breach of contract claim could be. The foundation of your lawsuit will play an important role in determining if your settlement is taxable.

You could also face the possibility of a tax bill if you are awarded punitive damages. Punitive damages are uncommon, especially in personal injury cases. As the name implies, these damages are not intended to compensate you for your losses following an injury. Instead, they are designed to punish the defendant for their behavior and deter others from acting in a similar way. These damages are taxable.

There is also the possibility of earning interest on a judgment. Even if that judgment stems from a personal injury case, you could be taxed on that portion of your compensation. Interest is common in cases where a verdict is awarded at trial but not immediately paid by the defendant.

There are other ways your settlement could result in tax liability. For example, many people who are waiting on a settlement will use the medical expenses from their accident as a deduction on their taxes. While there is nothing unlawful about this, recovering compensation on the same bills you used as a deduction is effectively double-dipping. In this case, you could face tax liability for your settlement.

Protecting Your Rights In Your Settlement

There are steps you can take to avoid any confusion over your tax liability. When you reach a settlement, it is in your best interest to negotiate language that makes the nature of your settlement clear. This is important if you have multiple claims against the same person. For example, if you have both a personal injury case and a breach of contract claim against the same individual, your settlement agreement should make it clear which portion of your compensation is dedicated to each claim.

If the language in your settlement agreement is unclear, you are at risk of confusion at tax time. If the IRS is unclear on the portion of your settlement that is taxable, you could receive a bill for the full amount. The insurance companies turn settlement information over to the IRS, so it is vital that the information is clear. An attorney from our firm could help ensure your settlement agreement takes your tax liability into account.

Talk to an Attorney About Your Tax Liability from a Personal Injury Settlement in Hawaii

When you settle your personal injury case, the chances are good that most if not all of your compensation will not be considered taxable income. While this should reassure you, it is important to note that some exceptions apply. An attorney could not only resolve your settlement in a way that avoids unnecessary tax obligations, but they could also help you understand how your settlement might impact your taxes to begin with.

If you are ready to pursue fair compensation for your injuries, now is the time to act. Contact the attorneys of Olson & Sons today for your free consultation.

 

Are Personal Injury Settlements Taxable in Hawaii?

Posted on by Olson & Sons

The majority of personal injury cases settle before they reach the courts. Some go to trial and usually result in a jury verdict that favors the injured plaintiff. But whether your case was settled out or in court, you may need to pay taxes on the settlement that you receive. Consulting a reputed Hawaii tax planning attorney is recommended before you make any financial decisions regarding your settlement to avoid surprises later on. In the meantime, find out if and when your personal injury settlement is taxable.

General Tax Rules on Personal Injury Settlements in Hawaii

According to the IRS’ settlements taxability rules, anyone who receives compensation for physical injuries and didn’t list it as an itemized deduction for medical costs associated with illness or injury in previous years won’t be taxed on that portion of the personal injury settlement. If this is the case for you, you also shouldn’t include the compensation in your taxable income.

Remember that the IRS can easily access the details of your settlement. In most cases, the insurance provider reports to the IRS the exact compensation amount you received when your claim was settled. The settlement check and release form typically don’t indicate the breakdown of damages included in the injury settlement.

Insurance providers normally pay out compensation in one lump sum, and it’s up to the recipient to allocate the amounts. More importantly, it’s your job to properly disclose any taxable portions of your settlements and pay relevant taxes on them. Otherwise, you will be subjected to penalties under the IRS tax laws.

Medical Expenses May Also Be Taxable in Hawaii

The IRS will only tax settlements for medical bills if you utilized qualified medical expenses for an itemized tax deduction on your tax return last year. Qualified medical expenses include medical expenses for diagnosing, treating, curing, preventing or mitigating a disease or affecting any body function or structure. Put simply, if you utilized the costs for treating your injuries to count as medical tax deductions on your tax return last year, this portion of your settlement must be treated as income and is, therefore, taxable. This also applies to joint filings.

Wages and Income Is Taxable in Hawaii

Your personal injury settlement might include compensation to cover your lost income or wages if you need to take time off work to treat and recover from your injuries. This is still considered income under tax rules, so you will need to disclose it when you file your yearly income taxes. Basically, the IRS expects you to pay taxes on that income, regardless of who paid that income. But, you should also be aware that other kinds of settlement compensation would be considered ordinary income by the IRS for tax purposes. These can include:

  • Emotional distress
  • Punitive damages
  • Lawyer fees if the gross income included the underlying recovery
  • Non-injury claim awards
  • Any interest on the settlement amount

It’s important to remember that while punitive damages can be taxed, not all personal injury settlements include them. These damages are usually awarded for punishing wrongdoers in high-dollar personal injury cases, such as defective products, medical malpractice, etc.

Hawaii Personal Injury Lawyer Fees May Be Taxable

If you work with your Hawaii personal injury attorney on a contingency basis, you’ll be taxed on the entire amount of recovered money. Basically, you need to pay taxes on the part of your compensation that is allotted to your attorneys as their professional fee. This will still apply if the defendant paid the lawyer fees. Ultimately, in physical injury claims where the entire compensation amount isn’t taxable, you won’t have any issues. But, if it is, having sound tax advice as early as possible is crucial.

A Vital Note on Hawaii Emotional Distress Taxes

Tax authorities differentiate between emotional distress awards that aren’t related to physical injury and pain and suffering compensation related to physical injury. The reason for this is that physical injuries are diagnosable in medical terms, while emotional distress for the same injury can’t. Nonetheless, emotional suffering is very real, and the emotional and physical are two components of the entire loss, meaning that they are not taxable.

However, emotional distress awards may be taxed when they’re not linked directly to the physical injury. Emotional distress symptoms like vomiting or headaches are not considered physical injuries, though compensation for medical expenses considers the same symptoms non-taxable. Besides emotional distress, compensation for something other than physical injuries, like injury to character or unlawful discrimination, will be taxed.

Seek Legal Advice from an Experienced Hawaii Tax Planning Attorney Today

The taxation of personal injury awards and settlements is nuanced and significantly depends on the specific circumstances and facts of every case. There many opportunities via proper and early tax planning to mitigate the potential tax consequences. A skilled Hawaii tax planning attorney can help guide you through the details.

Reach out to us here at Olson & Sons to arrange a consultation with one of our tax planning lawyers by calling our Kona office at 808-427-1025 or our Kamuela office at 808-201-1679. You can also filling out our online form for more information and to have someone contact you about your potential personal injury case.