Do I Have to Pay Taxes on a Personal Injury Settlement? A Personal Injury Lawyer in Greenville, SC Explains

When the careless actions of another person or business cause you serious personal injuries, lost wages, and even medical bills, you may be entitled to recover compensation for your “damages” under South Carolina law.

What Are Damages in a Personal Injury Case?

“Damages” is simply a legal team for what a party in a lawsuit can recover. For personal injury victims, damages are usually awarded in the form of money and are intended to make up for any injuries and for monetary losses. But our personal injury lawyers in Greenville, SC know that after a case has settled or gone to verdict, most victims and their families wonder if they will need to file their personal injury settlement amount as income when they file their taxes.

Here at Hammack Law Firm, we know how important it is for victims and their families to be fully reimbursed and compensated for losses resulting in a car accident, slip and fall, trucking wreck, dog bite, or other injury-causing accident. This is why our dedicated and experienced personal injury lawyers in Greenville, SC stay on top of federal and state tax laws.

Are Personal Injury Claims Taxable Income in South Carolina?

Most personal injury settlements, verdicts, or other types of awards have nontaxable portions. This is because federal tax law provides an income exclusion for any amount due to “physical injuries” or due to “physical sickness.” This means compensation for broken bones or spinal cord injuries is not taxed under either federal or state tax law.

However, most personal injury cases involve more than just claims for physical injuries. They can also include claims for the following:

• Pain and suffering
• Lost wages
• Lost future earnings
• Loss of consortium
• Property damage
• Punitive damages
• And more

As a result, determining whether your personal injury claims are taxable income in South Carolina depends on whether your damages are compensatory or non-compensatory.

What Are Compensatory Damages?

In personal injury lawsuits, compensatory damages are intended to reimburse or “make whole” a victim. In other words, returning a victim to his or her pre-accident status. They acknowledge that you have suffered some financial harm as a result of your accident, and any recovery made that is intended to reimburse your expenses is not considered income. These compensatory damages are also nontaxable.

Examples of Compensatory Damages in South Carolina

There are many forms of compensatory damages that a victim of a car accident, slip and fall, dog bite, trucking wreck, or any other type of accident may be entitled to under South Carolina law. Some of the most common forms of compensatory damages that are not taxable include the following:

• Pain and suffering – if your award for past or future pain and suffering is related to a physical injury or sickness, it is nontaxable. Where pain and suffering can get tricky is for emotional or cognitive injuries (i.e, post-traumatic stress disorder or PTSD). However, having an experienced personal injury lawyer who can develop your case and retain medical experts to tie your injury into a claim for physical suffering can help save you income tax.
• Medical bills – reimbursement for past or future medical bills and expenses is compensatory and not taxable in most instances. The only time it may be taxable is if you took an itemized deduction for your medical bills in a year prior to your recovery.
• Loss of consortium – this is compensation for the loss of relations, society, affection, guidance, and protection between spouses, but it can also be for loss of society between a parent and child, siblings, or other dependents of a close, familial relationship. As long as it is related to physical injury or sickness (usually requiring connection through a medical provider or expert), it is compensatory and nontaxable.
• Property damage – reimbursement for property damage to your vehicle, personal property (bicycle, clothing, or cell phone), or other property losses in an accident are considered compensatory and are nontaxable. There are rare exceptions. Burial costs and funeral expenses – after a wrongful death, reimbursement for burial costs, funeral expenses, and related expenses are compensatory and nontaxable.

Non-Compensatory Damages

On the other hand, non-compensatory damages are funds that are not intended to reimburse you for expenses that you paid. Non-compensatory damages are awarded for certain claims that are considered “extra,” meaning you would not have received them if not for the lawsuit. Because of this, non-compensatory damages are generally considered taxable income. Some of the most common forms of non-compensatory damages that are often taxable include the following:

• Lost wages – compensation for lost wages is taxable because you would have had to pay tax on those earned wages.
• Lost future earnings – if you are unable to return to work, or if you are forced to take a reduction in salary due to your injuries or disability requiring you to take a different job or position, you may be entitled to the difference between your old (higher) salary and your new (lower) salary. This is known as lost future earnings, and it is non-compensatory and taxable because you would have been taxed on those earned wages.
• Punitive damages – in rare cases where the conduct of a defendant or defendants is egregious and morally reprehensible, you may be entitled to punitive damages. These damages are non-compensatory because they are intended to punish the defendant(s) and deter others from engaging in similar conduct. These are always taxable, even if they are related to physical injuries.

Why Having an Experienced Personal Injury Lawyer in Greenville, SC Can Help Save You Additional Money

Although the tax law is generally clear on what forms of personal injury damages are taxable and are nontaxable, that does not mean you should just hire any lawyer to handle your claim. Whether a settlement is taxable may be determined by how the settlement paperwork is worded. Mistakes or drafting errors in a settlement or judgment could cost you additional tax money that you would not normally have to pay. By having an experienced lawyer like one of ours, you can take advantage of our skilled drafting and negotiation techniques to save you additional money that you may have been previously taxed on with a less-experienced lawyer.

Learn more about how the Hammack Law Firm can help you and your family during a FREE consultation with one of our personal injury lawyers in Greenville, SC by calling (864) 754-0498 or by sending us a private message through our “Contact Us” box available here.