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Are Personal Injury Settlements Taxable

Settlement occurs in a legal case when the parties resolve the case out of court. In a final settlement agreement, the parties generally waive their rights to sue or recover money in the other case. Regulation is encouraged by the courts because it reduces congestion in courthouses and allows parties to find a mutually beneficial solution. A bodily injury payment may be taxable, non-taxable or partially taxable depending on the type of case and the type of compensation for the injuries sustained. The taxable status of a bodily injury regulation often depends on whether or not there is a \physical injury or physical illness\. The Internal Revenue Service (IRS) has laid out several broad guidelines, but there is much controversy as to which specific injuries are taxable. Keep reading to find out more. Until 1996, most bodily injury settlements, whether for physical or emotional injuries, were tax free. However, the current law is more restrictive. Physical and physical injuries are generally not taxable. For example, Bob Smith is injured by a defective lawn mower and has a $ 90,000 medical fee. The lawn mower company moved in with Bob for $ 90,000. The Personal Injury Settlement will be tax free and Bob does not need to declare it on a tax return. But, like most legal areas, there are exceptions. If Bob has deducted medical expenses of $ 90,000 in a previous income tax return, the settlement will be taxable. 

A personal injury settlement with a monetary award based in part on emotional distress or mental anguish may be tax free. If the emotional distress or mental anguish is directly related to a physical injury or illness, it is considered \medical\ and, therefore, not taxable. Let's change some of Bob's rules. Bob settles again with the lawn mower company for $ 90,000. He received $ 60,000 for medical expenses due to extensive leg surgery. Bob also receives a $ 30,000 compensation for the mental anguish of having to live in a cast for more than six months and cope with the daily pain. Bob's $ 30,000 for mental anguish would probably be tax-free because they are directly related to his physical injuries. The legal fees associated with a personal injury and physical illness compensation may also be non-taxable. The amount received as part of a personal injury settlement awarded to the interests is generally taxable.

 As mentioned above, compensation received for emotional distress and mental anguish directly related to a physical injury or illness may be tax-free. However, where there is no relationship between the emotional distress or mental anguish and a physical injury or illness, the amount of the settlement is taxable. In this example, Bob is not injured by a lawn mower. Instead, Bob's neighbor tells several people that Bob steals money from the local church. These claims turn out to be completely false and Bob's local material business is ruined by his loss of reputations in the community. Bob files a defamation suit against the neighbor and