Do I pay taxes on my settlement monies from a Tampa car accident?

It seems that everything we do and touch is somehow taxed.  Some of these taxes are obvious, such as the federal tax that we pay on our earned income. But in addition to that there are such things as property tax, inheritance tax and fines which act just like taxes in that they take money from our pockets and puts it into the pockets of someone else.    Then there are the taxes that are not so obvious such as your yearly car registration fee and business licenses.

But there is one thing that at this time is free from taxation by any government entity…personal injury settlements.  In other words, money that you receive from a personal injury claim is not taxed whether it is received in a settlement with the at fault party or as a result of a jury verdict against the at fault party.  It is not taxed whether from a Tampa auto accident case or one for medical malpractice. 

The rule that this money cannot be taxed is part of our United States tax code.  So whatever money you  receive from an insurance company or an at fault party, after paying your attorney and your bills from medical treatment, comes to you without having to pay any taxes on it whatsoever.  Although there may be a line on your tax return asking if you received any personal injury awards during the taxable year including a award for injuries caused by a Tampa car accident, nevertheless the monies are not considered part of your taxable income.   Note that this tax code rule holds true regardless of the amount of your income and regardless of the amount of the award. 

The law changes all the time and it should be noted that recent case law has determined that some amount of your award for injuries resulting from a car accident Tampa or a medical malpractice in St. Petersburg can be taxed if the parties signed a confidentiality agreement.  A confidentiality agreement says that the parties have agreed that certain parts of the settlement agreement will not be made public.  The courts have determined that if a confidentiality agreement is included in the settlement, then some portion of the settlement for car accident injuries or any other type of case must be attributable to the confidentiality agreement.

This new case law came about when a famous basketball player allegedly injured a photographer at a basketball game. The two parties reached a confidential settlement outside of court.  The photographer who received the settlement monies was told by the IRS that he would be required to pay taxes on a rather significant portion of the settlement.  The IRS reasoned that the injuries were not that significant and a large portion of the settlement was for the confidentiality since the basketball player would want to keep this information from the public and would pay a significant amount of money to prevent the photographer from reporting the settlement to the public.  The photographer disagreed with the IRS’s decision and the IRS brought the photographer to court.   The court ruled against the photographer and in favor of the IRS.
Because the famous basketball player and the photographer nor their attorneys had any reason to anticipate that the confidentiality agreement would be taxable, there was no particular amount of the settlement agreement allocated to that aspect of the personal injury claim.  Therefore, the court determined what percentage of the personal injury monies were to be allocated to the confidentiality agreement and it amounted to quite a large sum. The court made its ruling along the lines of the same ruling as the IRS. The Court determined that the basketball player was looking to hide the amount of the settlement from the public because it might harm his reputation and so was willing to pay a large portion of the settlement amount to obtain the confidentiality agreement.

Because of the court's ruling in the case discussed above, it is very important that any settlement between parties in a Tampa car accident case or a medical malpractice claim include that includes a confidentiality agreement between the parties be handled very carefully.  One way to avoid any unnecessary additional tax liability if the defendant in a Tampa auto accident case requires a confidentiality agreement is put in writing the exact amount of the settlement is allocated to the agreement of confidentiality.  For example, the parties can agree among themselves “that for $10 and other good and valuable consideration the parties have agreed to a confidentiality agreement.” Therefore, in accordance with the law discussed above, the maximum taxable amount out of the settlement proceeds should be only $10.

Although monies that are received as part of a personal injury settlement for a Tampa auto accident or for injuries from medical malpractice case may not be taxed by the federal government, it doesn't mean that any interest that you earn from the investment of these monies can't be taxed. That is why when there is a relatively large sum received in settlement for injuries resulting from an auto accident in Tampa or other cities in Tampa Bay, it makes sense to consider a structured settlement.  With a structured settlement, any monies that are generated from interest are not taxed just as the original amount you received from the injury settlement that funded the structured settlement was not taxed.  This could have significant benefits to you and should be considered particularly when the settlement is a very large one.

Of course, before placing any monies in a structured settlement after a Tampa car accident or other personal injury claim, you must first understand that there are significant disadvantages as well as advantages to a structured settlement. For example, you would lose any ability to use the money outside of the structure for things such as emergencies and for purchases of ordinary expenses. This doesn't mean that the structured settlement shouldn't be used, only that all the factors involved with a structured settlement should be thoroughly examined and understood before making your decision. 

As you can see, the idea that personal injury settlement monies are not taxable by the federal government is a simple easy to follow rule. But it is very important that you hire a auto accident Tampa law firm with significant experience in handling Tampa personal injury cases if you want to be sure to take advantage of the IRS’s favorable tax treatment.  An experienced injury law firm will understand the tax implications regarding a confidentiality agreement and will understand how to negotiate and set forth in writing the agreement so as to minimize any tax consequences to you. Without significant experience handling car accident cases, it's very easy for the Tampa law firm or its attorneys to forget to include the language that was discussed above or language similar to it. In addition, only attorneys with significant experience may understand fully when a structured settlement should be used and make the appropriate recommendations to their clients. At our law firm, 100% of our practice is devoted to plaintiffs’ personal injury legal work.  Our firm handles only auto accident, medical malpractice and premise liability cases.  In addition, our law firm has the experience and devotion to excellence to be able to make sure that you don't pay any additional monies to the government from your settlement claim than is necessary and that all decisions are made with regard to your claim with your best interest in mind.  To speak with one of our Tampa car accident lawyers, contact us.