The taxation of a personal injury settlement in Nevada is a complicated issue. For the most part, a personal injury settlement is not taxable. However, there are exceptions for amounts awarded for certain damages, such as punitive damages. A personal injury attorney can help you structure your settlement to minimize taxation.
Most Personal Injury Settlements in Nevada Are Nontaxable
For the most part, the federal government does not tax money obtained as compensation for injuries or illness. Internal Revenue Code Section 104 excludes settlements and awards gained from lawsuits from taxable gross income on federal taxes. This means the majority of a settlement payment in Nevada will not be subject to federal taxation.
Federal law lists the following as nontaxable:
- Amounts received for workers’ compensation
- Amounts received by lawsuit or agreement for personal physical injuries or sickness
- Amounts received through accident or health insurance for personal injury or sickness
- Amounts received as pension or annuity for personal injury or sickness related to the armed forces
- Amounts received as disability income attributable to military injuries
Under this rule, most compensation collected for a personal injury accident – such as medical bills and property damage – will not be subject to taxation. However, there are some exceptions to this rule that you should be aware of as a claimant in Nevada.
Medical Expenses That Were Previously Deducted
A personal injury settlement amount awarded for a victim’s medical costs, including past and future foreseeable health care, is generally nontaxable. However, there is an exception if the individual deducted the same medical expenses on a previous tax return. If the medical costs were already claimed as a deduction, they will be taxed on the year that compensation is awarded. Otherwise, the individual would receive double tax benefits on the same medical bills.
Lost Wages
Compensation awarded to make up for job-related wages, income and earnings lost due to a personal physical injury or illness – including future capacity to earn due to a disability – is generally taxable. This is because this portion of a settlement agreement replaces income that normally would have been taxed.
Punitive Damages
In Nevada, punitive damages refer to an additional award that may be granted on top of compensatory damages if the defendant’s actions were particularly careless, negligent or wrongful.
According to Nevada Revised Statute § 42.005, if the plaintiff can show using clear and convincing evidence that the defendant is guilty of oppression, fraud or malice in connection with the incident, the courts may award punitive or exemplary damages. Federal law taxes punitive damages since they are not awarded to compensate the victim for actual losses.
Interest
If a settlement accrues interest while the case is pending, interest earned is categorized as taxable income. This includes pre-judgment and post-judgment interest earned. A personal injury lawyer can help you understand the tax implications of interest on your settlement to provide more accurate financial planning.
Why Contact a Lawyer for Settlement Tax Planning?
Working with a personal injury lawyer on your case can make it easier to understand the complexities of tax laws and which portions of your settlement may be subject to taxation. Your attorney may be able to reduce or avoid taxes on your settlement by structuring it properly. Itemizing the damages in your settlement agreement, for example, can give you a clear idea of what parts are and are not taxable.