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.