Do I Have to Report Personal Injury Settlement to IRS?
If you’ve been injured and have received a personal injury settlement, you may be wondering if you have to report it to the IRS. The answer is yes, in most cases, your personal injury settlement is taxable under IRS and California rules.
The IRS outlines its personal injury settlement tax rules in Publication 4335, detailing the taxability of personal injury settlement, including which damages are considered taxable and which aren’t. Generally, damages received for physical injury or physical sickness are not taxable. However, any other damages received, such as lost wages, lost earning capacity, or emotional distress, are taxable.
It is important to note that if you receive a settlement from a lawsuit or other legal action, you must report the settlement to the IRS. You should also keep a record of the settlement, including the amount of money received, the date it was received, and the reason for the settlement.
When filing your taxes, you must report the settlement as “other income” on your federal tax return. You will also need to report the settlement on your state tax return, if applicable. Depending on the state you live in, you may also need to report the settlement to the state’s Department of Revenue.
It is important to note that if you are claiming a deduction for medical expenses related to the injury, you must subtract the amount of the settlement from the total amount of medical expenses you are claiming. This is because the IRS does not allow you to deduct medical expenses that have already been compensated by a settlement.
If you are unsure about how to report your personal injury settlement, it is best to consult a tax professional. They can help you understand the tax implications of your settlement and ensure that you are filing your taxes correctly.
In conclusion, yes, in most cases, your personal injury settlement is taxable under IRS and California rules. It is important to report the settlement on your federal and state tax returns, and to keep a record of the settlement. Additionally, if you are claiming a deduction for medical expenses related to the injury, you must subtract the amount of the settlement from the total amount of medical expenses you are claiming. If you have any questions or concerns about reporting your personal injury settlement, it is best to consult a tax professional.
