Many people have questioned whether their personal injury settlement in San Francisco is taxable. This is a legitimate question since people are still determining whether all the money they have received will go into their pockets or if Uncle Sam will get a share.
Long and drawn-out personal injury cases can be draining for everyone, especially if you don’t have a competent attorney who can brief you on the procedure. When the case is over, former clients ask their attorneys about taxes, an issue their accountant often brings up.
Most accountants should already know that personal injury settlements are not taxable if the client has sustained a physical injury. Still, they prefer to double-check with the personal injury attorney to avoid making errors.
It is worth noting that you will be taxed for your settlement if you have not sustained any injuries. So, any damages accumulated must be directly related to injuries from the accident. However, there is still some confusion on the matter and related questions that confuses settlement receivers, making it necessary to clarify all the details on this broad but straightforward topic.
Let’s explore all the details relating to personal injury settlements and taxes in San Francisco, California.
Are Personal Injury Settlements Taxable in San Francisco?
The most common personal injury settlements in San Francisco, California, are related to motor vehicle accidents and include pedestrian and bicycle-related injuries. You should know that the settlements you receive are primarily used for paying your medical bills and compensating you for the loss and pain you have experienced as a direct result of your injuries.
For example, suppose you have been injured in a motor vehicle accident due to another driver’s negligence and required expensive medical treatment. In that case, it will be paid for by the settlement you receive.
You will be glad to know that this personal injury settlement is not taxable if you have experienced physical injury and damages resulting from the accident. Other cases, such as employment or harassment cases, are typically taxable, meaning you should not confuse them with a personal injury settlement. For clarity, you should always consult your attorney for more insights on the matter.
Regarding personal injuries, you can rest assured that you can utilize the full sum of money granted to you for your losses and damages. Many people need this money because they can’t work and earn money to sustain themselves and their families. The law exists for this reason, and personal injury settlements are usually fair. However, in some circumstances, you may not get what you’re due since all factors cannot be considered.
Suppose your workplace offers periodic salary increments due to performance. In that case, you may only be able to make a strong case for extra compensation due to lost performance if you have an experienced and competent attorney representing your case. It is unfortunate, but the reality of the situation implies that some loss will still be experienced, which may not be accurately reflected in the settlement amount.
What Does a Personal Injury Settlement Cover in California, and How Much is Taxable?
After determining that you have sustained injuries in an accident in California, you are entitled to compensation for any damages accrued and losses experienced. Personal injury settlements can include other accidental circumstances, such as a slip and fall at a store or injury due to the malfunction of a defective product. Most commonly, people get injured in traffic accidents due to another’s fault, resulting in the need for compensation.
A personal injury settlement typically covers medical bills, lost salaries, and other damages, such as for private property. In most cases, this sum is not taxed, but the IRS or the State of California may tax a portion of it, depending on the circumstances.
The most significant portion of a personal injury settlement is assigned to medical bills and expenses due to the injury. The settlement will pay for these expenses if you’ve broken a bone or sustained a head injury.
Your settlement will reflect this amount if you have sustained a loss of income. However, it is worth noting that the IRS will tax this portion of the settlement since your wages are already taxed. You should hire a competent personal injury attorney for your case for the exact taxable percentage.
Many people who sustain injuries from an accident are also compensated for their pain and suffering, which is not taxed. People can develop serious mental health issues, such as post-traumatic stress disorder, resulting in pain and mental anguish. The psychological impact of the accident is also considered and covered in a personal injury settlement without being taxed.
If your property is damaged in an accident, you will be compensated for this loss in the settlement. It will only be taxed if your received amount is higher than your property’s value. So, any extra money you have received from the settlement will be treated as taxed income.
In some cases, you might receive compensation for interest and punitive damages. Unfortunately, this amount is taxable, and you can consult the IRS publication for complete details on this matter.
What Percentage of my Personal Injury Settlement Will be Taxed?
As mentioned above, you will not have to pay taxes for the settlement intended to compensate you for losses relating directly to the physical injuries you have sustained from the accident. Although you may have received a specific amount for emotional distress, it will be taxed if it is not due to the accident or physical injury.
Taxes depend heavily upon the claim’s origin. Many clients sue the guilty party for physical injuries accrued due to negligence; the settlement amount received for this is not regarded as taxable income. However, it is worth noting that your attorney’s fees are factored into your total income. If you receive a settlement amount of $100,000 and your attorney charges $40,000, the total income is not $60,000 but the full amount.
The exact percentage of taxable income for your settlements can be discussed with your attorney, who will provide you with accurate numbers based on your particular circumstances. For this reason, it is worth consulting an expert instead of just leaving it to your accountant to figure out.
How Can I Protect My Personal Injury Settlement From the IRS?
Depending on the particular circumstances, personal injury settlements are usually awarded after long legal battles. Some lawsuits are more complex than others, especially if it is not obvious who was at fault for negligence. However, after receiving your settlement, there are some steps you should take to protect it from the IRS so you don’t have to pay any unnecessary taxes.
The best way to protect your personal injury settlement from the IRS is to separate the money you receive from your wages. Open a new bank account and deposit the settlement in there while ensuring you never deposit any extra sums of money into that separate, segregated account. If you wish to avoid being taxed for your settlement, make it a point never to mix money into your settlement because it can remove the exemption for this compensation.
The IRS is at perfect liberty to counter the non-taxability of this money, meaning you should do everything possible to separate your settlement from your other earnings. This way, you can maintain exclusion and keep your funds safe from unnecessary taxation due to common mistakes. Your settlement will stay protected from creditors, meaning they will not be able to file a lien against this amount legally.
How Much Money Can You Expect From a Bodily Injury Settlement in San Francisco?
Bodily injury settlements in California can be complex or straightforward, depending on the degree of injuries and medical expenses. You might need to learn what constitutes a fair settlement and the costs of your medical treatment. Hence, it’s helpful to consult a lawyer for your particular circumstances.
Bodily injury settlements can vary depending on the severity of injuries, and you can receive anything between hundreds to millions of dollars. Some cases are long and drawn out and require much investigation to determine who was at fault due to negligence. Most personal injury cases are settled without going to trial. You can expect to receive an average of $21,000 in car-related accidents.
However, more can be awarded due to the abovementioned factors, such as lost wages and mental anguish. Although some elements are taxable, they still add to your total settlement amount. Therefore, you need to hire the right lawyers for your case.
Property damage usually includes damages to automobiles and personal items like smartphones and laptops, which add to the settlement amount. However, in some cases, you might be partly to blame for the accident, which is up to the court to determine.
For example, if you stand to receive $30,000 and the court decides you are 20% at fault, you will receive $24,000 as compensation. From that amount, a percentage will go to your attorney, who handles your case.
The three main factors taking a fraction of your settlement are shared liability, insurance policy limits, and uninsured motorists. However, the quality of your personal injury lawyer also affects how much you can obtain from a settlement. Inexperienced attorneys may overlook some expenses and need to learn how to handle insurance companies who may avoid the total amount.
What is the 52-Week Rule of Compensation For a Personal Injury Settlement Case?
A personal injury settlement is awarded after conducting an investigation. It involves determining the extent of personal injuries, property damage, and other factors affecting the settlement amount. In all cases, the amount is not taxed if evidence suggests a direct link to the cause of the accident. For example, suppose your medical bills result directly from the accident. In that case, the relevant bodies will not tax the settlement amount you receive for them.
After receiving a settlement, you are allowed 52 weeks to transfer the money into a segregated bank account. This period protects against your settlement being treated as capital and enables you to allocate your money into a personal injury trust.
You will lose this protection as soon as you begin using the funds, but the defense will still apply to the funds left untouched. You can expect there to be an inquiry regarding your expenditures by the DFC. The investigation will ensure you are using it for the proper purposes and not for personal benefits, like increasing entitlement.
To summarize, the 52-week rule allows you to put your settlement in a personal injury trust. It is not treated as your personal capital.
Personal injury settlements can make a big difference in a person’s life, especially if they have suffered ongoing issues, such as long-term disabilities, mental disorders, and property damage. In most cases, if you’re attorney is experienced, they will be able to make a strong case and get the settlement you deserve.
Although you may be partly to blame for an accident, you will still receive a sizeable chunk of non-taxable money for your injury-related expenses. Some portion of the settlement may be taxed if not directly related to the accident, meaning it will be treated as income. No special tax rates apply for personal injury settlements, which is something to keep in mind.
Phoong Law specializes in personal injury cases related to car, truck, motorcycle, bicycle, pedestrian, and slip-and-fall accidents. Their personal injury lawyers deliver incredible value and ensure you receive the settlement you deserve by going the extra mile.
Speaking with a tax expert regarding your particular circumstances is advisable. Not all cases are alike, and your tax situation may be different.