Are Personal Injury Settlements Taxable in Louisiana?

When you are injured because of someone’s carelessness, you likely have the grounds for a personal injury claim. Most of these claims are settled prior to trial on an amount that covers the damages you sustained. When you are navigating this claim or securing the payout, you may wonder, “Are personal injury settlements taxable in Louisiana?” It’s important to understand how the IRS (Internal Revenue Service) taxes certain portions of these settlements.

Understanding Personal Injury Settlements in Louisiana

A personal injury settlement happens when an injured party and the party that caused them harm come to an agreement, either in negotiations after filing in civil court or through insurance negotiations. Personal injury settlements are a frequent part of civil court. From 2019 to 2020, there were 7,373 civil filings in all three Louisiana districts. Personal injury cases are a very common type of civil claim.

A settlement compensates an injured individual for their damages, including their lost income, medical bills, property damage, and pain and suffering. The claim is filed against the at-fault party or their insurer on the basis of that party’s negligence, recklessness, or misconduct.

From 2018 to 2021, personal injury cases were the highest cause of civil claims throughout the U.S. In 2020, the number of personal injury claims in the U.S. was significantly higher, with 259,385 personal injury claims compared to 81,530 in 2019. This increase can be attributed to a 250,000-claimant product liability case filed in late 2019.

When many people file claims at the same time, it is called a mass tort. Whether a personal injury claim is a singular case or a mass tort, it is important to understand how the IRS taxes settlements. There are different portions of a personal injury settlement, and these portions may be handled differently.

How Are Civil Claim Settlements Taxed?

There are several elements of a civil claim to consider separately, including:

• Lost Income
  The IRS generally requires that all amounts you receive should be reported as income, but there are certain exceptions. One of those exceptions is any amount paid due to physical injury.However, the portion of your personal injury settlement that recovers your lost wages may not be included. This is because it is compensating you for income that would have been taxed under normal circumstances. If your lost wages were directly caused by your personal injury, however, they may be excluded from your total gross income for taxes.
• Medical Bills and Injuries
  The damages you recover that compensate you for a personal injury or physical sickness are not taxable. This does not include workers’ compensation claims. The only case where you would have to include the information on your taxes is if you took an itemized deduction for medical bills on returns in prior years. The benefits you gained in those prior years must be properly addressed when you receive the final settlement.
• Noneconomic Damages
  Damages for emotional distress and other noneconomic damages may be taxable if they are not related to a physical injury. However, in most personal injury claims, noneconomic damages are directly related to your physical injury. When this is the case, they are not subject to employment taxes and do not need to be included in your gross income.
• Punitive Damages
  Punitive damages, rather than compensating you for a loss, are assigned to punish the at-fault party. These damages are taxable. The only case where punitive damages are not taxable is when they are awarded as part of a wrongful death claim.

How Are Insurance Settlements Taxed?

In many personal injury claims, the claim is filed with an insurance company and settled through the insurance claim. When this is how your claim is settled, you, as the claimant, are not typically responsible for the taxes on the settlement. The insurance company that issues the payment is required to issue the appropriate tax form.

FAQs

Is a Personal Injury Settlement Considered Taxable Income?

In most cases, the IRS does not consider a personal injury settlement taxable income. There may be specific damages that are taxable. Insurance settlements, which are common ways for personal injury cases to be settled prior to civil filing, are typically not taxable to the claimant. Instead, the insurance company is taxed on the payment. An attorney can help you understand the specifics of your case and what portions of your settlement may be taxed.

Do Settlements Need to Be Reported to the IRS?

You must report the aspects of settlements that are taxable to the IRS. If the settlement is non-taxable, then you do not have to report the settlement. Generally, most personal injury settlements are non-taxable, with some exceptions. If you received a settlement for emotional distress or mental anguish, and those damages did not stem from a personal injury, then the settlement is taxable and must be reported as other income to the IRS.

What Type of Settlements Are Not Taxable?

Rather than different types of settlements being taxable or not taxable, there are certain portions of settlements that may be not taxable. Income from any source is taxable, but there are certain exceptions. This includes the amounts in certain discrimination claims and the amounts paid for physical injury. This does not apply to workers’ compensation claims.

Within the excluded claims, there may be certain types of damages that are taxable even in those claims, like punitive damages.

Can the IRS Take Money From a Personal Injury Settlement?

The IRS may tax some portions of a personal injury settlement, although not all of the elements in the settlement are taxable. Certain types of noneconomic or emotional trauma damages are taxable. Punitive damages, if they are awarded in your case to punish the at-fault party, are also taxable. The income recovered in a personal injury settlement is excluded from income tax.

The Importance of Talking With a Professional

State and federal tax laws are different and can also affect you in unique ways depending on your unique claim and other circumstances. It is crucial that you review your case with a legal professional to better understand the consequences of taxes on your personal injury settlement.

At the Cox Law Firm, we have more than 135 years of collective experience amongst our team, and our firm has spent decades supporting the interests of those in our community. When you need help maximizing your personal injury settlement and determining how taxes impact that settlement, contact our firm and see how we can help.