How to Report Personal Injury Settlements to the IRS
The Internal Revenue Service does not require a taxpayer to pay taxes on or report all personal injury settlements she is awarded. Settlements that include a physical injury without the taxpayer deducting medical expenses for that injury on a previous year's return are not required to be reported. The IRS requires taxpayers to report and pay taxes on settlement income that includes interest, emotional distress, punitive damages and discrimination.
Instructions
- 1
Review your previous year's return to find out if you claimed the medical bills for the injury as a deduction. File the amount of settlement on IRS form 1040, line 21, if you claimed the deduction, as you owe taxes and are required to report the settlement. Do not include the settlement if you did not deduct expenses, as you are not required to report the settlement. File the settlement amount under other income.
2Report interest on income from the settlement. File on line 8a on IRS form 1040, under interest income.
3File punitive damages on IRS form 1040. Insert amount on line 21 under other income.
4File under other income, line 21 of IRS form 1040 to report the balance of the settlement amount for emotional distress after medical expenses have been deducted. Do not include the medical expenses deducted in previous returns. Attach an itemization of the expenses to your return.
5File employment discrimination and reputation injury settlements. Use IRS form 1040 and write amount on line 21 under other income.
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BalasHapusGreat article! You have made some really good points here. I would add here that IRS can always challenge the non-tax ability of a settlement, specifically allocating the settlement like this gives you the best chance of having most of the settlement excluded from taxation. It is also essential to consult your case with a professional personal injury lawyer who can help you in your tough times.
BalasHapusthe repair was going to well exceed that amount. My conversation with the insurance representative was very instructive and gave me some insight into what everyone must go through with their own insurances companies.
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