Will A Personal Injury Settlement Affect My Louisiana Taxes?
The answer to whether personal injury settlements affect Louisiana taxes is a definite…maybe. Over the last few years, the laws have grown more complex over what is taxable and what is not. At one time, lawsuit settlements were considered untouchable, but revenue hunters have made some types of injury settlements taxable.
According to legal and financial experts, the taxable income depends on the type of settlement you reach. In Louisiana, personal injury settlements for lost wages and lost profits can be considered the same as ordinary income. Settlements that pay to return capital or personal property aren’t taxable because you’re only receiving restitution for the property you already owned. The taxability of the settlement funds depends entirely on the origin of the initial claim.
Possible Effect of Paying Taxes on Lawyer Fees
Uncertain, muddied aspects of the origin laws include the treatment for attorney fees. For example, if you hired your lawyer on a contingency basis, taxes may be charged to your account on the lawyers’ fees.
Other questions that arise include treating attorney fees when the attorney represents multiple parties. If the plaintiff’s employer is charged with making a settlement or paying an award, does the employer deduct withholding for income taxes? The problems of dealing with settlement income can become tremendously complex.
IRS Exceptions
The IRS recognizes an exemption when the origin of the claim is based on physical injuries or illness. Therefore, the money awarded in such settlements is exempt from taxes because of the nature of the physical illness or injury. However, the money awarded for emotional distress, which can be just as real, is viewed by the IRS as taxable.
Getting Sound Legal Advice
According to tax advisors, successful plaintiffs often overlook the federal and state taxes on income from settlements, and that can come back to haunt you for years.
In general, damages received as a settlement of judgment are taxable federally. Nevertheless, some damages may be excluded from taxation, such as compensation for personal physical injuries, gifts, inheritances, disaster relief payments, and cost reimbursements. In addition, payments that exceed the value of personal property are treated as capital gains income.
Hiring an Attorney
The smartest thing is to contact a professional personal injury lawyer from New Orleans to discuss your case and determine whether you must pay federal and state taxes on any settlement or award. Your attorney can explain all your options for paying taxes, but you first have to win a settlement or award. An experienced attorney can help you in many areas, and most offer legal representation in personal injury cases on a contingency basis.
Tax-Exempt Status and Taxing Legal Fees
The debate grew ever more acrimonious over the last few years regarding the treatment of compensatory damages awarded for physical injuries and illnesses. As a result, more and more people advocate treating compensatory awards for mental and emotional distress as tax-exempt income.
A bigger problem for many is that your lawyer might take 40% of your award on contingency, but you might be forced to pay tax on the payment amount. The law states that you’re responsible for taxes for up to 100% of your recovery. The only way to deduct those fees is through miscellaneous itemized deductions on your taxes below the line.
Unfortunately, above the line deductions are disallowed until 2025, except for those cases involving employment law, civil rights, and whistleblower cases.
Simplifying Terms
Most lawsuit settlements and awards in Louisiana qualify for tax-exempt status because personal injury cases resulting in physical injuries or illness are tax-exempt. You might receive a large settlement based on emotional distress, pain and suffering, and punitive damages. In this case, you will owe both federal tax and state tax. However, always check with your attorney and tax adviser because your case could be different. Most likely, your attorney will explain everything you need to know in case you win your claim or lawsuit. Nevertheless, consulting with an accountant or tax expert will do you a world of good.
ABOUT THE AUTHOR:
With a law degree under his belt, Mark Scott understood very early that law communication was a relatively neglected area. He decided to help people by “translating” the language and offering information and advice in a clear, useful, and actionable manner. For this reason, instead of finding him in court, you will most likely find his name online, where he is very active and thriving as a legal columnist. His part of making the world a better place is to make the law a less convoluted maze. He aims to make it easier for people to understand when and how to seek legal counsel, how to proceed in a significant number of legal matters, and to find the proper resources so they can stand up for their rights.
