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If I get a personal injury settlement, how is it paid and what about taxes?
I was injured at a restaurant months ago and filed a slip and fall lawsuit against the restaurant owner. My lawsuit was successful and I am receiving a settlement to cover the damages I have suffered. However, there is a large tax lien against my home. How is the money distributed as I receive this settlement? Am I required to pay the lien off with the proceeds first? What if the remaining balance falls short of covering my medical bills?
Answers
This is a rather complicated matter and depends on a variety of circumstances and laws within your state governing tax liens and personal injury settlements. Generally, personal injury settlements are taxable for punitive damages awards; moneys received for emotional trauma, pain and suffering, etc.
The settlement amounts which are used towards medical bills and expenses you have occurred are not taxable. Often, medical and tax liens would generally receive priority in receiving the proceeds of this settlement to satisfy the debt. Since you are required to report your settlement earnings in your tax return, the IRS will be well aware of the extra income you have received.
You should ask your personal injury on counsel for this matter and if they are not sure how the proceeds will be distributed, consult with a tax attorney. Perhaps you may be able to work out an installment plan or delay repayment further, but it is rather unlikely.
Talk to a Personal Injury Lawyer to find out how much you may be entitled to, and what options you have.
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Posted by Frank Rivero on 02 Jun 2010