Are Injury Settlements Taxable In Massachusetts? An Injury Lawyer Explains IRS Rules
It’s everyone’s favorite time of the year - tax season.
We have good news for you: If you received a monetary settlement for any physical injury or sickness, you do not need to claim the settlement money as income. The full amount is non-taxable both on the Federal level and in Massachusetts.
The only reason your injury settlement or a portion of it “could” be taxable is if you chose to use your medical expenses related to your injury as part of an itemized deduction. But generally speaking, Massachusetts injury settlements are non-taxable and you don’t have to claim your settlement proceeds as income.
Accident and injury settlements can include payment for a variety of damages, such as lost earning capacity, emotional distress, medical bills, attorney fees and more. In general, the IRS will not ‘get involved’ with your settlement allocation for these types of damages as long as it’s consistent with a typical settled claim.
“If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income,” the IRS reports.
You only need to claim a portion of the settlement as income IF you included “in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit,” according to the IRS.
If you deducted certain medical payments that were then covered by your settlement, you will need to claim that portion of your settlement as “other income” on line 21 of Form 1040, Schedule 1. The IRS has a special form and specific instructions to help you. The report is called Recoveries in Publication 525, and you can find instructions on how to calculate the amount of money you need to report in the publication.
Emotional distress and mental anguish also follow the same rules. If you received any proceeds or settlement for emotional distress or mental anguish which was a result from a personal physical injury or sickness case, the settlement proceeds are treated in the same way as the injury and sickness proceeds described above and are not taxable.
If you were compensated for emotional distress or mental anguish that did NOT originate from a physical injury or sickness, you then must claim the settlement as income to the IRS. The amount you need to report is reduced by two factors, however. You can reduce the amount you claim as income by the amount you had to pay for medical expenses (as long as you haven’t already claimed them), and by any amount that was previously deducted for medical expenses as long as you were not provided a tax benefit.
The net taxable amount of your emotional distress or mental anguish should be reported as “Other Income” on line 21 of Form 1040, Schedule 1, according to the IRS.
If you would like to request any documents or publications from the IRS related to your injury settlement and any reporting you need to do, you can find them online at www.IRS.gov, or you can even order paper copies by calling 1-800-829-3676.
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