When you file an Oklahoma personal injury claim, you just want to be made whole and settle your claim for the full and fair compensation you deserve. However, there are countless issues to consider in a legal proceeding. One concern you may have is whether your settlement proceeds will be taxable.
The Internal Revenue Code, Section 61 (I.R.C. §61), states that all income from whatever source derived is taxable unless another section of the IRC specifically excludes it. But are settlement proceeds considered income? The answer is that it depends on the reason you received the proceeds.
Fortunately, an experienced Warhawk Legal personal injury attorney in Oklahoma City will skillfully guide you through all stages of your claim and help you avoid common pitfalls, including knowing when settlement compensation could be taxable.
If you have been injured due to another party’s negligence or wrongdoing, we want to help you recover and keep maximum compensation for your damages. Call (405) 397-1717 or visit our contact page and schedule a free consultation to discuss your personal injury claim.
Types of Damages Received in Settlements and Awards
Settlement proceeds and awards can be divided into three types of damages: economic, non-economic, and punitive damages.
While punitive damages are rarely awarded, economic and non-economic damages typically account for the majority of compensation received by personal injury victims.
Most personal injury compensation is not taxable since it is not income. It is “compensation” that is designed to make you whole. However, some types of settlement proceeds and awards may be taxable, depending on the reason for the payment. For state taxes on personal injury settlements and awards, Oklahoma follows federal tax laws.
When Personal Injury Settlements Are Not Taxable in Oklahoma
When proceeds are received for damages related to a physical injury, they are generally not taxable. The IRC §104(a)(2) provides that damages (except for punitive damages) received “on account of” physical injuries or sickness are excluded from gross income.
Damages received on account of physical injuries, and therefore not taxed, include economic expenses such as medical costs and lost wages. However, it also includes non-economic damages resulting from bodily injuries, such as pain and suffering, emotional distress, loss of consortium, and other intangible damages incurred as a result of a physical injury.
The only exception to damages recovered on account of a physical injury is when you have deducted related medical expenses in a previous tax year and then are later compensated for those expenses. If you used your personal injury-related medical expenses as a tax deduction, you must include the award for those damages to the extent that they provided you with a taxable benefit.
When Personal Injury Settlements Are Taxable in Oklahoma
Personal injury settlement and verdict proceeds may be taxable if they are received as punitive damages or for damages not related to a physical injury or illness.
Emotional distress and other damages incurred for non-physical injury or illness will be taxable as gross income. However, if you paid out-of-pocket medical expenses related to intangible damages, you would not need to include that portion of proceeds in your taxable gross income unless you previously used those expenses as a tax deduction.
An example of this scenario would be a personal injury victim who received emotional distress damages for discrimination or sexual harassment. Since the damages are not related to a physical injury or illness, the settlement or award proceeds would be taxable.
Punitive damages are awarded to punish the defendant and to deter similar future conduct, not to compensate the injury victim. Therefore, punitive damages are taxable.
Consult an Experienced Oklahoma Personal Injury Lawyer Today
If you have been injured in an accident due to another party’s fault, you may be entitled to recover compensation for your damages. However, you need the assistance of an experienced Oklahoma City accident attorney to help you secure maximum compensation and help guide you skillfully through your legal proceedings.
It is essential to understand that how settlement proceeds and verdicts are classified determines whether they are taxable, and to ensure your settlement agreement clearly distinguishes between taxable and untaxable proceeds.
Our experienced personal injury attorneys will help you maximize your compensation. Call (405) 397-1717 or visit our contact page to discuss your personal injury claim.