It’s everyone’s favorite time of the year - tax season.
If you were involved in an accident or suffered an injury that resulted in a settlement, you might be wondering if your injury settlement is taxable in Massachusetts.
Are Personal Injury Settlements Taxable in Massachusetts?
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. This means you do not need to report your personal injury settlement to the IRS as “income” when you complete your taxes.
The only main 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.
What Does a Personal Injury Settlement Include?
Accident and injury settlements can include payments of money 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 personal injury 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.
Average Percentage of Personal Injury Settlements that are Taxable
Most personal injury settlements are NOT taxable in Massachusetts. Depending on the settlement award, it is possible that part of your award could be considered “income,” and therefore taxable.
Any damages or money awarded for physical injury or sickness, including compensation for medical expenses, pain and suffering, and lost wages related to a physical injury or illness is generally not taxable under federal or Massachusetts state law. They are not taxable because the settlements themselves are not considered “income.”
For example, this would mean that settlements for injuries sustained in a car accident would be tax-free.
Similarly, any settlement awards in workers' compensation-related injury claims are also not taxable in Massachusetts.
Possible Exceptions: When Injury Settlements May be Taxable
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Punitive Damages: Punitive damages are considered income. Punitive damages are different from settlement awards and are actually damages that are awarded in excess of the settlement amount. The purpose of punitive damages is to punish the defendant (the person responsible for your injury). Because punitive damages are considered income, punitive damages are taxable in Massachusetts and at the federal level. Punitive damages are rare in Massachusetts and are only available in specific types of personal injury and negligence cases, such as wrongful death cases. It is estimated that punitive damages are awarded in less than 5% of personal injury cases in Massachusetts.
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Emotional Distress or Mental Anguish: If you are awarded damages for emotional distress or mental anguish that was NOT caused by a physical injury, it is taxable. Learn more about this below.
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Interest on the Settlement: If you are awarded any interest on the settlement award, including pre- or post-judgment interest, that amount is taxable even though the settlement itself is not taxable.
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Lost Wages: If you receive compensation for lost wages in a case that is not related to a physician injury, then that payment is taxable.
If you have more specific questions about how these rules might apply to your case and your settlement award, work with your attorney to make sure you understand the settlement award and how it is structured. You can also consult a tax professional to understand your specific situation and your possible income reporting requirements.
Common Exception: You May Need to Report Your Personal Injury Settlement as Income to the IRS if You Took a Medical Expense Deduction
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.
What About Compensation for Emotional Distress?
Damages you receive for emotional distress and mental anguish also follow the same rules. If you received any proceeds or settlement for emotional distress or mental anguish that was a result of a personal physical injury or sickness case, the settlement proceeds are treated in the same way as the injury and sickness proceeds described above, so they are not taxable.
A Narrow Exception for Emotional Distress Damages
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. However, the amount you need to report is reduced by two factors. You can reduce the amount you claim as income by 1) the amount you had to pay for medical expenses (as long as you haven’t already claimed them), and 2) 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.
Get More Resources and Information Regarding your Personal Injury Settlement from 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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If you suffered injuries in an accident, we’re here to help. Spada Law Group has helped people get sizable settlements for injuries in Massachusetts for decades. We can review your claim and advise you on the best way to move forward.
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