The tax man and your settlement funds: who gets what?
This is a basic guide to what your tax liability for settlements or verdicts in a personal injury or medical malpractice claim could be. This guide is for Oregon settlements, but may be applicable to other states. Check with a local personal injury attorney to know for sure.
Non-economic damagesThis the most common kind of settlement from a personal injury case. These are also referred to as "pain and suffering" damages. Non-economic damages are not taxed. This means that any windfall, be it as little or as high as your imagination can think, will never be taxed. In Oregon, jury verdicts are capped at $500,000 in non-economic damages. However, settlements can be higher as attorneys will generally make sure that all or most settlement funds are designated as non-economic in order to lessen your tax burden.
Economic damages and lost wagesAnytime a settlement is for lost wages or is designated as economic damage you must pay all applicable federal and state taxes on the issued funds. This should be a consideration when considering whether one should head to trial. Settling a claim for non-economic funds for a lesser amount may actually net you a higher number than a larger jury verdict based upon tax implications. Discuss this with your attorney when considering settlement of a large economic loss claim.
Future and past medical expensesGenerally speaking, future medical expenses are not taxable. However, past medical expenses could be. If you receive a settlement that includes money for medical expenses you deducted in an earlier year, the amount that you deducted is taxable in the year you receive it, but only to the extent that the deduction actually reduced your taxable income.
If a settlement includes funds for future medical expenses, the amount is not taxable, but you also cannot deduct the future medical expenses except for any amount that exceeds the award.
What happens if the tax laws change?Tax laws are always changing. This guide is accurate as of December 19, 2017 and will be updated as best as can be upon major changes to tax laws effecting settlement funds. Always discuss tax issues with a lawyer at the time of your settlement. This guide is designed to give you an idea of what to expect in your case.