When you’ve been seriously injured in an accident in Michigan and expect to win a sizable settlement, you may be concerned about having part of your award claimed by taxes.
Take heart. In Michigan, most victims are not required to pay taxes on their personal injury settlement. There are exceptions, however.
When hiring your Michigan personal injury lawyer, ask about the tax implications of a settlement or verdict. Our team will fight aggressively to obtain the compensation you are entitled to and help you minimize any tax consequences on your settlement if applicable
Is a Personal Injury Settlement Considered Taxable Income in Michigan?
In general, Michigan does not tax income from a personal injury payout . This is because Mich. Comp. Laws Ann. § 206.30 generally does not categorize payment for bodily harm as taxable income.
When trying to determine whether a car accident settlement or other personal injury settlement is taxable income, consider:
- Who is recovering compensation and what settlement terms are
- What is the compensation for
What Can and Cannot be Taxed After an Injury Settlement?
When determining if you have to pay taxes on insurance payout, it is important to consider what portions of your injury settlement can and cannot be taxed.
Your personal injury settlement typically addresses losses like medical bills, pain and suffering, and for lost wages. Much of this payment does not count as taxable income in Michigan your no-fault insurer paid for certain damages, as required by state PIP law. To put it simply, the PIP benefits offered by your insurer are not taxable, per Mich. Comp. Laws Ann. § 500.3107.
Lost Income Exceptions
While some of your lost wages are not taxable under PIP, you may have additional lost income not covered by PIP benefits. PIP typically covers up to three years of lost income. If this applies to your case, you may have to pay taxes on some of the compensation you receive for lost wages or income.
Attendant Care Expenses and Taxation
On the other hand, payments for attendant care services have unique requirements. These payments are not taxable if they are offered to the injured party. However, payments are taxable if the caretaker is paid directly. Attendant care help disabled people pay for help to perform daily living tasks that they can no longer do on their own or without help.
Emotional Damages for Personal Injury losses
That brings us to payouts for emotional and mental damages. These losses can have long-reaching repercussions, and you may need significant compensation to address this harm. Generally, emotional damages are not taxed.
However, if your settlement is confidential, this can complicate matters. You may need to pay taxes for all of your awards if you are trying to keep the amount private. Your lawyer can discuss your options with you if you are interested in a confidential settlement amount.
There may be methods to help preserve your privacy while also preventing you from paying taxes unfairly. Insurance law changes from time to time so it’s important to hire a lawyer who can stay up to date on the specifics. The right personal injury firm will help you weigh all your options and make sure your choices are fair to you while meeting state and federal taxation guidelines.
The reason for the award can also determine whether these damages are taxed or not. Essentially, if your emotional damage is not related to physical injury caused by the other party’s negligence, it could be taxed.
What if I Deducted Medical Expenses?
If you previously deducted medical expenses on your taxes, you may have to pay taxes on this amount. Work with an accountant to help determine it this applies to your case.
What About Punitive Damages in a Personal Injury Settlement?
Punitive damages are usually taxable, although these kinds of rewards are rare in personal injury cases. Michigan accident victims can receive exemplary damages, which are similar to punitive damages, but not quite the same. However, these damages can be taxed.
What if My Claim Accrued Interest?
If your payout accrued interest for any reason, you typically have to pay taxes on this amount. Our lawyers can let you know when these circumstances may apply.
What if My Loved One Died in a Personal Injury Accident?
When a loved one dies and you pursue a Michigan wrongful death claim, you may think that different taxation laws apply to these types of payouts. However, wrongful death settlements are not usually taxed, unless they meet certain exceptions like those listed above.
Of course, you may have unrelated taxes to pay when handling your loved one’s estate, so make sure you have financial and legal guidance in these circumstances.
Do I Need to Report My Settlement to the IRS?
For the most authoritative answer, ask your personal injury lawyer or tax professional whether your settlement must be reported to the IRS, either for state or federal taxes. It depends on the individual facts and circumstances of your specific case. For instance, your settlement may be the sum of multiple claims, not just one.
The general rule, however, is no.
A tax-savvy attorney will structure each claim to give you the greatest advantage. The IRS will typically go along with the settlement and only expect you to report the taxable portions of your settlement if they fit with the claims. Current IRS guidance helps to clarify tax implications.
How Will I Receive My Personal Injury Settlement?
Typically, personal injury settlements take two forms: structured settlements and lump sums. A lump sum is a single payout of benefits, whereas a structured settlement is multiple payments over time as determined by a settlement.
Taxes can play a role in both of these scenarios, depending on what you receive as part of your damages. Our lawyers can explain your payout options and the benefits and drawbacks of these choices.
Contact a Personal Injury Lawyer in Detroit If You’ve Been Injured
If you have questions about the taxation of damage awards, Michigan personal injury settlement payments, or any other aspect of your personal injury claim, Christensen Law can help. With our firm, you pay no legal fees unless we win, and your initial consultation is free.
Contact us now and give yourself the full advantage of a personal injury firm with the skill, experience and resources that can achieve the compensation you need and deserve.
