Very few people who end up injured in an auto accident or another incident think about personal injury claims until they get hurt. This is understandable. However, victims have a lot of questions post-accident. Many clients ask us if their personal injury lawsuits are taxable in Maryland.
Baltimore personal injury lawyer Randolph Rice breaks down which parts of a settlement are taxable in the state of Maryland.
Is My Maryland Personal Injury Lawsuit Taxable?
Victims of car accidents in Maryland often assume personal injury lawsuit settlements and verdicts are taxable. If they won $1 million in Maryland Lotto it would be heavily taxed. Why not personal injury settlements?
However, personal injury settlements are not taxed as a general rule because they are meant to compensate you for your loss. it wouldn’t be fair for the federal or state government to take a cut.
The Maryland Civil Jury Instructions state compensatory damages awarded to the claimant (known as the plaintiff) are “not income within the meaning of federal and Maryland income tax laws.”
This means the accident victim will not have to pay any income tax on the amount awarded as damages. the instruction points out the jury should not add on an amount to the award to take taxes into consideration.
Most personal injury lawsuits are not taxable in Maryland. That means jury verdicts or settlements. it includes the resolution of insurance claims before a case even reaches. lawsuit. Neither the federal government (via the IRS) nor the State of Maryland, can tax you on the settlement or verdict proceeds in most personal injury claims.
Which Elements of Personal Injury Are Not Taxable in Maryland?
Damages recovered as a result of physical injury are not taxable. This extends to lost wages, medical bills, future medical costs, pain and suffering, and emotional trauma that was caused by the accident that left you with an injury.
The IRS rule §1.104-1 on compensation for injuries or sickness sets out the federal position on taxes for personal injury payouts.
The IRS excludes “damages received from personal physical injuries or physical sickness” from taxes. However, punitive damages are taxable. the tax law states: “Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2). Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care (described in section 213(d)(1)(A) or (B)) for emotional distress.”
Read more about the taxability of settlements from the IRS.
Are Punitive Damages Taxable in Maryland?
Yes. Punitive damages are an exception to the rule that injury-related compensation is not taxable. Punitive awards are defined as additional money intended to punish a defendant in a case.
Maryland courts rarely award punitive damages meaning this exception is unlikely to apply to your case. However, punitive damages are sometimes awarded to Maryland residents in federal cases such as mass torts brought against the maker of a dangerous drug.
Are Property Damage Awards Taxable in Maryland?
Property damage awards usually only compensate the property owner for the value of what he or she lost in the accident. the victim doesn’t make money. the CPA Journal points out that when a payment represents a “return of capital destroyed or injured, the money received, to the extent, it does not exceed the basis of the property, is not taxable.”
You are unlikely to be taxed on recovery for property damage to a car. In some cases, the value of repairs to a home could exceed the value of the property.
Are Claims for Emotional Damage Only Taxable in Maryland?
A verdict or a settlement is only non-taxable if it arose from a physical injury. This means claims for areas such as emotional distress only or employment discrimination are taxable in the absence of an injury. In practice, people injured in a car wreck in Maryland seldom make claims for emotional injuries alone. These conditions are usually the result of an accident that also caused physical injuries.
Is Interest in Personal Injury Cases Taxable in Maryland?
Both pre-judgment interest and post-judgment interest is taxable. In Maryland, pre-judgment interest is only applicable in uninsured motorist cases. Post-judgment interest could be relevant when the defendant appeals a verdict.
Are Workers’ Compensation Settlements Tax-Free in Maryland?
Workers’ compensation settlements are reached under a different formula to personal injury cases. You bring workers’ compensation claims against your employer for injuries or illnesses that were caused by your job. You don’t have to prove that your employer caused your injury to make a claim.
Although the workers’ compensation and personal injury systems are different, the law treats taxation similarly. Workers’ compensation settlements for injuries or occupational sickness are also tax-exempt as are payments from a public welfare fund.
Ensuring Your Settlement is as Tax Exempt as Possible
Some claimants bring two cases against a defendant. One relates to personal injury and another relates to another issue such as a contractual claim. Settlements from contractual claims are not tax-exempt.
If the personal injury claim is considerably larger than the non-personal injury claim, you should explicitly point out in the settlement agreement what amount of the settlement relates to the injury claim and what part relates to the non-personal injury claim.
If you fail to split up the settlement, the IRS may challenge the non-taxability of a settlement and seek to tax it all. A Waldorf personal injury lawyer will help you avoid any taxation traps of this nature.
Ask Our Maryland Personal Injury Lawyer if Your Lawsuit is Taxable
Talk to your Maryland personal injury lawyer if you are concerned your compensation will be taxed. This is not an issue in the vast majority of personal injury cases.
Although we are not tax attorneys, our Anne Arundel County personal injury lawyer can help you with the basics relating to injury cases. At Rice, Murtha & Psoras, we help people hurt in car, truck, and motorcycle cases and other personal injury matters on a daily basis. Call us for a free consultation at 410-694-7291.