When another person’s negligent behavior injures you, you deserve to get compensation for your harms without having to wonder about the tax implications, particularly if you are considering settlement offers. That is why federal tax code contains an exemption for income derived from damages or settlements stemming from personal injuries.
However, not every form of damages is included in this exemption, so it is important that you have legal representation to help you work through how taxes may apply in your case. This is particularly important if you are considering settlement offers, as there may be steps you can take to limit your tax exposure.
You can get the help that you need today from one of the dedicated South Carolina personal injury attorneys at Burriss Ridgeway Injury Lawyers. To get your first case evaluation free of charge, call us today at (803) 451-4000.
How Are Settlements of Personal Injury Claims Treated by Tax Law in South Carolina?
Many are concerned that their settlements will be subject to taxes, affecting how much they will actually recover. Fortunately, your entire settlement will not be taxed, and the applicable tax will only touch a small portion of what you recover.
Under Section 61 of the Internal Revenue Code (IRC), all income is taxable from whatever source derived unless exempted by another section within the IRC. For the purposes of settlements, that exemption can be found in IRC 104. Under IRC 104, income that a person receives from damages or settlements for legal claims may be excluded from taxable income.
The exemption exists because damages are meant to make the plaintiff whole again after the harms that they have suffered. However, this only applies to certain types of damages in certain types of cases.
Is There a Difference Between Settlements and Damages from Winning a Lawsuit for Tax Purposes?
Under IRC 104, both compensation from damages ordered by a court in a civil suit and compensation from a settlement of that claim may be excluded from taxable income. In other words, the exemption will apply whether you decide to pursue your lawsuit or choose to settle it. There are many factors to consider when evaluating settlement offers on your case, but the tax implications of these issues should not be among them.
What Parts of a Lawsuit Settlement are Taxable in South Carolina?
IRC 104(a)(2), the section that provides the exemption, states that money that comes from damages and settlements “on account of personal physical injuries” will be excluded from taxable income. This phrase makes the issue a little complicated. In order to identify which parts of the compensation package are subject to taxes, you will have to determine what they stem from.
For instance, compensation for medical bills and lost wages will nearly always be free of taxation. This is because these losses stem directly from the injuries you sustained and are meant to restore equity, so taxing them wouldn’t be fair to the victim. Noneconomic damages, or damages that address the victim’s pain and suffering, will also avoid taxation when they go towards the pain and suffering caused by the injury.
However, some forms of noneconomic damages address pain and suffering caused by other sources that are not the personal injury itself. In these cases, the most likely cause of the pain and suffering is either the injury or the accident that caused the injury. For instance, if you were injured in a serious car accident and developed post-traumatic stress disorder as a result of your experience, the compensation based on your psychological consequences might not fall within IRC 104 and, therefore, may be subject to taxes. However, psychological conditions resulting from the physical injuries themselves are indeed within the IRC’s definition and can avoid taxation.
Outside of compensatory damages (or those meant to make the plaintiff whole for their harms), there is another type of damages that may constitute a substantial portion of damages that is not featured under IRC 104 – punitive damages.
Are Punitive Damages Taxable in South Carolina?
Unlike compensatory damages, punitive damages are meant to punish the defendant rather than compensate the plaintiff for their harms. These damages are not available in every case and are reserved for situations where the defendant’s behavior was so wanton or egregious that the court determines they owe more in damages than just what would make the plaintiff whole.
In South Carolina, punitive damages can only be given where the victim proves by clear and convincing evidence that the wrongdoer acted recklessly. Recklessness is more than just being careless. Rather, the term is legally defined as the conscious indifference to, or disregard for, the safety of another. In other words, a defendant may be found to be reckless if they ignored the safety of others or acted despite knowing they were in the wrong, regardless of the consequences.
Because punitive damages are based on the defendant’s conduct and not the plaintiff’s “personal physical injuries,” the compensation paid through punitive damages is not exempt from taxation under IRC 104.
The possibility of punitive damages being awarded in a given case will be factored into a settlement agreement. However, an experienced Columbia personal injury lawyer may be able to structure your settlement so that you can avoid taxes on as much of your compensation as possible. This is why you should always have legal representation when dealing with your case, even if you plan to settle your claim rather than going to court. Never accept any settlement deal without first discussing it with your attorney.
Discuss Your Lawsuit or Settlement Value with Our South Carolina Personal Injury Lawyers Today
To ensure that you get all of what you deserve from your claim, reach out to the seasoned Lexington personal injury attorneys at Burriss Ridgeway Injury Lawyers to get a free initial case evaluation by calling (803) 451-4000 today.