Is My Personal Injury Settlement Considered Taxable Income in South Carolina?
If you’ve been injured due to someone else’s negligent actions, you can receive compensation for the lost income and medical expenses you have sustained.
What Can I Recover in My Personal Injury Claim?
You might hear the word “damages” frequently while looking into a personal injury suit, but what does it mean? Damages describe what you can recover from the at-fault party. They are intended to make up for the monetary losses you suffered after an injury. After receiving a settlement, you might wonder if you need to file the settlement amount as income.
Is My Settlement Taxable Income?
Most likely, your settlement will have a nontaxable portion. Any amount you were awarded for “physical injuries” and “physical sickness” are excluded from your income by federal tax law. Injuries like broken bones or spinal cord injuries are not taxed under either federal or state tax law. But sometimes the damages you were awarded didn’t compensate you just for physical injuries but also included:
- Lost Income
- Loss of future earnings
- Pain and suffering
- Loss of consortium
- Punitive damages
- Property damage
To determine if your settlement is taxable income in South Carolina, you must find out if the damages were compensatory or non-compensatory.
What are Compensatory Damages?
In South Carolina, you may be entitled to compensatory damages in a car accident, slip and fall, dog bite, trucking wreck, or other accident. Here are the most common types of compensatory damages that are not taxable:
- Medical expenses: any past or future bills you incurred due to an injury are compensatory and not taxable. This compensation may be taxable if you took an itemized deduction for your medical expenses the year before your recovery.
- Pain and suffering: as long as this was recovered for a physical injury or illness, it is not taxable. Emotional or cognitive injuries can be trickier to understand. An experienced lawyer can make sure your claim is completely tied to physical suffering so that none of your settlement is taxed.
- Property damage: Damage to your vehicle or other personal property, like clothing, cell phone, or bicycle, are compensatory and nontaxable.
- Loss of Consortium: This includes compensation for loss of relations, affection, guidance, and protection for spouses and loss of society between a parent and their dependent. As long as these claims are tied to physical injury or illness, they will be considered compensatory and nontaxable.
What are Non-Compensatory Damages?
Non-compensatory damages are different because they aren’t reimbursing you for the expenses you paid, like compensatory damages but are extra damages awarded only through filing a suit. As a result, these damages are usually considered taxable income. Common types of taxable non-compensatory damage include:
- Punitive damages: sometimes, the at-fault party acted so negligently that you are awarded punitive damages meant to punish them for these egregious actions and deter any similar behavior in the future. These damages are non-compensatory and always taxable.
- Lost wages: since your wages are already taxable, the amount you are awarded to make up for lost wages is taxed as well.
- Future lost earnings: if your injuries have made you unable to continue working or left you with a reduced salary, you can recover damages that will compensate you for the difference. Just like lost wages, you would already be getting taxed on your wages, so these are considered non-compensatory and taxable.
Final Thoughts
Settlement paperwork can determine whether your awarded damages are taxable or not, so getting an experienced personal injury lawyer who understands these complex factors will ensure you don’t get unnecessarily taxed on your settlement. Although you are not obligated to hire an attorney, any mistakes made during this process could lead to you paying more taxes than you otherwise wouldn’t have by getting expert legal help.
