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Are Personal Injury Settlements Taxable Income?

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Personal injury settlements are protected at the federal level and are tax exempt. The settlement funds are not classed as a form of income because they are intended as compensation. This may be compensation for pain and suffering, lost wages, or medical bills.

There are many different types of claims that can be made depending on the personal injury case necessary. For example there are workers compensation claims, wrongful death claims, physical sickness, physical injury, negligence claims, or a workcover claim etc.

Compensatory damages or punitive damages are designed to put the individual back in as close a position as they were prior to their personal injury. Personal injury settlements aim to correlate the compensation payment to create a loss equal situation.

What Is Personal Injury Compensation?

Personal injury compensation is a lump sum payout received due to a proven injury which has arisen as a result of negligence. This may be negligence by either an individual, group of individuals or company. If you can prove that the injury sustained directly correlates with a negligent act then you will be entitled to compensatory and punitive damages.

A personal injury settlement is designed to compensate for the following;

  1. Medical Expenses or medical bills;
  2. Lost wages;
  3. Emotional distress or mental anguish; and
  4. Pain and suffering.

The payment is not designed to act as income and therefore cannot be considered taxable income. The funds received are to compensate and attempt to put the person back in their original position prior to the injury. Usually, the payment will be made as a lump sum however in some instances periodic payments may be how punitive damages are paid.

How Do I Make A Personal Injury Claim?

If you think you have a personal injury case, you should contact a personal injury lawyer for assistance in making a claim. The available evidence will need to be assessed to see whether your claim has merit or not.

Your lawyer will be able to put together your claim, whether it be a workers compensation claim, physical illness claim, etc. You may be eligible for a free consultation with your lawyer whilst they assess your eligibility.

It is critical that before making a claim your medical expenses and physical injuries are settled. In compensation situations, the injuries need to be settled so that there is no requirement to re- litigate or reclaim. In some circumstances the payments may be made as periodic payments but usually the payment will be made as a lump sum straight into the claimants bank account.

Why Are Personal Injury Settlements Non-Taxable?

Personal injury settlements are tax free or tax exempt as they are not classed as income. There is no requirement pursuant to state tax rules to disclose any payments, lump sums or otherwise, to the Australian Taxation Office when you complete your tax return. If you are concerned about this however you can consult a tax attorney.

It is important that any and all evidence of the payment be kept so that if the tax office questions a claim the settlement money or lump sum payment can be explained.

There are certain circumstances however where you may be required to pay taxes in relation to the use of personal injury settlement money. If, for example, you use the money received from a personal injury settlement to start a business, any profit received would be classed as taxable income. This does not create a tax obligation on the original money, only on the income generated as a result of that money.

A different example relates to interest earned from the compensation or settlement money. If you put the money in your account and earn interest as a result then the interest will be taxable as income. This is why it is critical to seek legal advice if you have concerns about what tax treatment will apply. You will need to seek the advice of an account for particulars about whether a tax deduction or tax benefit can be applied.


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