Understanding Personal Injury Settlements and Taxes

Personal injury clients sometimes ask whether they will have to pay taxes on any compensation recovered in a personal injury claim. The answer is that in most cases, Uncle Sam will not tax the majority of a personal injury settlement.

Personal injury claims are meant to make people who have been injured because of others’ carelessness or recklessness financially whole. At Younce, Vtipil, Baznik & Banks, P.A. we help people who have been seriously injured in accidents through no fault of their own seek full compensation for medical expenses, lost income from missed work, pain and suffering,  property damage (such as in a car accident), and more.

In general, the IRS taxes income. But Internal Revenue Code Section 104 exempts certain income derived from lawsuits, settlements, and awards from taxation depending on the reason it was awarded. Specifically exempted are “any damages (other than punitive damages) received … on account of personal physical injuries or physical sickness.”

As your attorneys, Younce, Vtipil, Baznik & Banks, P.A. would work to structure any settlement you were to receive to minimize your tax burden where possible. We also would advise anyone receiving a substantial settlement to consult a tax advisor.

Types of Compensation Recovered in Personal Injury Cases

A personal injury claim may seek three types of compensation for the individual who has been injured:

• Economic damages, which repay the plaintiff for their monetary losses, such as medical bill payments, lost wages while injured, car repair bills, and diminished earning capacity if the injuries impair the plaintiff’s ability to work for a living.
• Noneconomic damages, which the plaintiff may demand for their physical pain, emotional suffering, loss of enjoyment of life, or loss of consortium.
• Punitive damages, compensation meant to deter wanton acts of recklessness and warn others that such behavior will not be tolerated. Punitive damages are only sought in extraordinary cases and are seldom awarded.

The Internal Revenue Service’s general rule is that all income is taxable from whatever source derived unless exempted by another section of the code.

As we’ve seen, the Tax Code does exempt economic and noneconomic damages derived from personal injury lawsuits in most cases. However, punitive damages, if any are awarded, are taxable in North Carolina.

Are Economic Damages Awarded in Personal Injury Claims Taxed?

In general, economic damages demanded in a personal injury claim, also known as “compensatory damages,” are meant to reimburse the plaintiff for their actual expenses and financial losses. Damages due for medical bills and property damage are based on bills and receipts. Because there is no monetary gain, economic damages are not treated as income and therefore are not taxed.

However, a taxpayer may deduct medical expenses from their taxes for the year they occurred. If this deduction is taken in a year prior to receiving a lawsuit settlement or award, all or part of the compensation the taxpayer eventually recovers for medical bills would be taxable.

It might seem like damages paid for lost wages or diminished earning capacity would be taxed as income, but the IRS Code excludes from gross income “the amount of any damages (other than punitive) received … on account of personal physical injuries or physical sickness.” Further, IRS guidance on tax implications of settlements and judgments says, “the Service has consistently held that compensatory damages, including lost wages, received on account of a personal physical injury are excludable from gross income.”

Are Noneconomic Damages Awarded in Personal Injury Claims Taxed?

Noneconomic damages are so named because there’s no specific dollar value for losses due to pain and suffering. They are paid to compensate the plaintiff for unjust physical pain or discomfort, loss of amenities, and mental distress.

When these payments are a direct result of physical injury, they, too, are exempt from taxation. In a guide focused on the treatment of lawsuit settlements and awards proceeds, the IRS considers a typical recovery in a personal injury case to illustrate the usual meaning of “on account of personal injuries” —

Assume that a taxpayer is in an automobile accident, is injured, and, as a result of that injury, suffers (a) medical expenses, (b) lost wages, and (c) pain, suffering, and emotional distress that cannot be measured with precision. If the taxpayer settles a resulting lawsuit for $30,000 (and if the taxpayer has not previously deducted her medical expenses …), the entire $30,000 would be excludable under § 104(a)(2).

The medical expenses for injuries arising out of the accident clearly constitute damages received “on account of personal injuries.” Similarly, the portion of the settlement intended to compensate for pain and suffering constitutes damages “on account of personal injury.”

Interest Payments on Personal Injury Claims are Taxed

North Carolina law requires insurers to pay interest on claims not paid within the statutory time frames. If the case requires going to court, a final settlement or jury award may include an interest payment on compensation the plaintiff should have had sooner.

Any interest paid on a personal injury claim would have to be reported as income and be subject to taxation.

Contact Our Personal Injury Attorneys

At Younce, Vtipil, Baznik & Banks, P.A. we understand that after a serious injury, you may be unsure of where to turn for help and what the implications of a personal injury lawsuit may be. Our attorneys and legal staff are here to help you understand your legal options and how the law applies to your injury. If we believe that you have a valid injury claim, we will be ready to help you pursue compensation through an insurance settlement or lawsuit.

It costs you nothing to discuss your legal options with an experienced and compassionate personal injury lawyer. An initial legal consultation is free. Contact us today to get started.

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Family Law Attorney at Raleigh Law Firm Named a 2023 Super Lawyer Rising Star

Only a small percentage of lawyers in a state are honored as rising stars each year

The law firm Younce, Vtipil, Baznik & Banks is pleased to announce that partner attorney Ashley T. Banks has been recognized by the Super Lawyers rating service as a 2023 North Carolina Rising Star.

Each year, no more than 2.5 percent of attorneys in the state are selected by the research team at Super Lawyers to receive this honor. A Thomson Reuters business, Super Lawyers rates attorneys in more than 70 practice areas that have attained a high level of peer recognition and professional achievement. The annual selection process includes a statewide survey of lawyers, independent research, and peer reviews by practice area.

Ashley Banks concentrates her practice on family law matters, including separation agreements, child custody, domestic violence, equitable distribution, divorce, and post-separation support.

Ms. Banks grew up in Chapel Hill and obtained a bachelor’s degree magna cum laude in political science from North Carolina State University with dean’s list honors. She attended Campbell University Norman Adrian Wiggins School of Law and received her Juris Doctor in 2013.

A skilled advocate for her family law clients, she was named a partner at Younce, Vtipil, Baznik & Banks in 2020. 

About Younce, Vtipil, Baznik & Banks, PA

The law firm of Younce, Vtipil, Baznik & Banks, PA, provides experienced, compassionate, and effective legal representation to people in family law matters and domestic issues. The firm also represents individuals who have been injured in workplace accidents or hurt in other types of accidents. The firm’s attorneys have received honors, including an AV Preeminent rating from the respected Martindale-Hubbell Law Directory. Younce, Vtipil, Baznik & Banks serves clients throughout the Triangle region and across North Carolina from its offices located at 3701 Lake Boone Trail, # 300, Raleigh, NC 27607. To contact the firm, call 919-661-9000 or fill out an online contact form.

 

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How to File a Class Action Lawsuit

When a group of people have been injured in the same way by an unsafe product or defective drug, for example, those injured may find that a lawsuit is better pursued as a class action.

There are some advantages to requesting that the court combine individual lawsuits into a single class action. A primary benefit is that the significant financial costs of preparing this type of lawsuit are shared by multiple law firms.

Many class actions are product liability claims asserting that the negligent design or manufacture of a consumer product or medical device led to numerous people being harmed. These cases require extensive research to prove the design or manufacturing defect.

How Do I Know If My Case Qualifies As A Class Action?

For a single lawsuit to become a class action, there must be multiple lawsuits that make similar claims of negligence against the same defendant.

To handle the cases most efficiently, a federal district court may combine multiple lawsuits into a class action. When a class is certified, the court names one of the plaintiffs and their case as the representative of the class. The representative case moves forward on behalf of the class, and the members of the class share in the results.

The Federal Rules of Civil Procedure allow the courts to combine multiple claims as a class action if:

• The number of similar lawsuits makes it impractical to try them individually
• The lawsuits, or potential class members’ claims, share common questions of law or fact
• The claims of the injured people being proposed to represent the class are typical of the claims of the rest of the class; and
• The representative parties will fairly and adequately protect the interests of the class.

Individuals must decide whether to become members of the plaintiff class. By doing so, they generally relinquish their rights to sue the defendant individually.

Steps To Filing a Class Action Lawsuit

To become part of a class action, you would:

• File a complaint along with one or more other plaintiffs asserting the same or similar negligence and damages against a single defendant.
• Ask the federal district court to declare a class action.
• After the court certifies the proposed class, the class action lawsuit will proceed to discovery, pretrial motions, and, in many cases, settlement negotiations.
• If a settlement agreement is reached, the court must certify it as fair, reasonable, and adequate.
• If the case goes to trial, a judge or jury will determine whether the party being sued is financially liable. If the ruling favors the class, the judge or jury will determine a monetary award to be divided among class members.

If a settlement is approved or an award is handed down, the attorneys and the court will set rules for distributing compensation to class members, including opportunity and requirements to join or be excluded from the class.

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What Questions Should You Ask a Personal Injury Lawyer?

Selecting the right personal injury lawyer to represent you after an accident involves knowing the right questions to ask. You want to choose an attorney who has handled cases similar to your case and who will take the time to understand your needs.

The North Carolina personal injury lawyers at Younce, Vtipil, Baznik & Banks, P.A. help accident victims seek just compensation when someone else is responsible for their injuries and financial losses.

More often than not, we can negotiate better settlements for our clients than they could recover on their own. When you hear about someone suing over an accident, it means the insurance company refused to offer a fair settlement.

If you have been significantly injured in an accident someone else caused, you should speak to a personal injury lawyer. An initial consultation with Younce, Vtipil, Baznik & Banks, P.A. is always free. Below are some of the questions you may consider asking a personal injury lawyer when selecting a lawyer to represent you.

Have You Handled Similar Cases Before?

A prospective attorney should have experience with the same type of accident – car accident, truck accident, slip and fall, dog bite – and with accidents of the same complexity as yours. More complex cases, such as ones with multiple potential defendants or product liability cases requiring extensive research, typically require firms with multiple experienced lawyers and more resources.

Seek a lawyer who has been successful in cases comparable to yours.

Do You See Difficulties with My Case?

A prospective attorney should be forthcoming with you about the strengths and weaknesses of your claim and how he or she expects to overcome any difficulties with the case. A personal injury law firm won’t take a case unless they expect to win it.

Do NOT hire a lawyer who only tells you the positives of your case. Either that lawyer is dishonest, or he/she may be susceptible to being ambushed by the defense. You need an honest lawyer who will be ready for everything.

Personal injury attorneys and their clients work very closely together. You want to work with someone who respects you enough to be forthright with you, listens to you, and responds to your concerns.

How Much Is My Case Worth?

It’s normal to wonder what your case might be worth. However, be wary of any lawyer who promises or even predicts that you will recover a certain amount of money. Early in the case there are too many unknown facts to even estimate the end result. For instance, you cannot assume how well you will heal from your injuries until you have completely finished the healing process. The value of a case is highly dependent on the long-term prognosis of the victim.

What Are Your Fees? Do I Pay Advanced Costs if I Lose My Case?

Almost all personal injury attorneys work on a contingency fee basis. You don’t pay attorneys’ fees unless the attorney recovers money for you through an insurance settlement or court award. If the attorney wins or settles your case, then you pay an agreed percentage of any settlement or jury award, plus expenses.

Personal injury law firms pay the costs of cases up front, and a prospective attorney should stipulate which – if any – case-related costs will be your responsibility in a loss. The North Carolina State Bar requires the lawyer to make the client responsible for litigation costs. Litigation costs include such expenses as medical record procurement costs, expert witness opinions, court reporter fees, court filing fees, deposition fees of doctors, etc.

What’s My Role as a Client?

Firms vary in how involved they want their clients to be. A lawyer should explain what their firm expects in terms of client participation. This is another chance to see whether you and the lawyer you are interviewing are a good fit.

Younce, Vtipil, Baznik & Banks, P.A. will be happy to answer all of your questions about a potential personal injury claim. Contact us in Raleigh, NC at 919-661-9000 or online for your free initial consultation.

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