Can You Be Taxed For Settlement Money?

Does any portion of claimant or plaintiff’s settlement money belong in the hands of the U.S. government? Sometimes it does.

The government should not touch any cent that has been received as compensation for injuries. That would include all the money that was meant to cover medical costs. It would also include all the money that had been meant to cover the claimant’s lost wages, as per personal injury lawyer in Chicago Heights.

Whenever a physical injury has caused emotional or mental issues, those, too, fall into the category of damages that must get compensated. Yet those payments do not cause the victim to receive taxable funds.

Punitive damages can be taxed

If a court has authorized such payments, it has not done so with an eye towards helping the plaintiff to get back to the point where he or she was earlier. Instead, it has chosen to hit the defendant with an added punishment.

Courts call for payment of punitive damages if a defendant has demonstrated egregious behavior. In a personal injury case, evidence of such behavior could serve as proof of the defendant’s negligence. A court’s desire to prevent a repetition of such behavior might explain the decision to burden the defendant with punitive damages.

Sometimes lawyers try to convince a judge to reduce the number of punitive damages that have been imposed on a client’s defendant. When attempting to make that change, the same lawyers take advantage of the fact that a plaintiff can have as many compensatory losses as he or she wants.

The time between announcement of a court-ordered award and the plaintiff’s actual receipt of that same award might result in delivery to the plaintiff of taxable funds.

The minute that a judge has made such an announcement, the plaintiff has been told that he or she deserves whatever amount of money has been mentioned. Consequently, any attempt by the defendant to appeal the judge’s decision would result in a delay of the delivery of the plaintiff’s award.

Now, when defendants lose an appeal, the plaintiff in the appealed case must wait longer than expected for the promised money. Hence, the plaintiff’s introduction of that waiting period makes the plaintiff deserving of interest, on top of the expected award. Still, that interest must be added to the judge’s court-ordered award.

In the eyes of the U.S. government, that interest has no direct relation to the plaintiff’s injury. For that reason, the government feels that it should be taxed. It is like an unexpected bonus. Employees must pay a tax on any money that was part of a bonus.