Paying Taxes On Your Personal Injury Settlement

Personal injury laws are part of a group of laws called tort laws.  The intent of tort law is to put the person back to where the person should have been if the accident had never happened.  A lot of personal injury claimants are disappointed by the end result, because they are not ahead after a settlement or verdict.  The reason they are not ahead is because the law never intended a person to get ahead as part of the compensation received in a personal injury claim.  Taxes on personal injury settlement actually compliment the law, because for the most part there are not taxes in personal injury claims.

A personal injury claim is generally speaking not taxed.  Even a $3 million dollar settlement is not likely to be taxed at all.  Best of all the rules permit a personal injury settlement victim to invest the proceeds and earn interest tax free.  The device is referred to as  a structured settlement.  A structured settlement is basically an agreement with an insurance company that will make payments in the future at specific rate.   The rate of return is not enormous, it is more likely than not a very modest rate of return.  Often the rate of return is only around 4%, but the advantage is that the proceeds are tax free and the insurance company is financially strong.  The recipient gets a good rate of return tax free when taxes are taken into consideration.   More often than not the recipient wants a large lump sum all at once. 

The problem with large sums paid immediately is that the recipient will more likely than not spend it all in a matter of months.  It is not much different than lottery proceeds.  Suddenly every relative has a financial need and before you know the recipient has spent it all.  The bigger problem is that large sums are only paid when the injury victim is actually severely injured and the end result is often a substandard living standard or poverty when a person is no longer able to earn a living and has no steady payments from a structured settlement.

Taxes can become a problem when the individual also executes a confidentiality agreement.  Often extra is paid to keep a settlement confidential, these proceeds necessarily require the identify with precision how much is actually going to be paid to keep quiet.  Often this is not specified and the recipient may pay substantial amounts of taxes, much more than was actually received for keeping quiet.