Hurt in an accident in Spartanburg or elsewhere in South Carolina? If you are preparing to pursue a personal injury settlement, you may be wondering about your tax obligations. This raises an important question: Do you pay taxes on lawsuit settlements? The short answer is “it depends.” However, for personal injury cases, any settlement is generally tax-free. There are only limited exceptions for when taxes may be required. Here, our Spartanburg personal injury lawyer explains the most important things to know about taxes and personal injury lawsuits in South Carolina.
Is a Personal Injury Settlement Taxable?
Is a personal injury settlement taxable income? We need to refer directly to the guidelines from the Internal Revenue Service (IRS). The key section of the law is IRC code section 104(a)(2). It makes it clear that most personal injury settlements in South Carolina are not taxable. The federal tax code explicitly excludes damages received for personal physical injuries or physical sickness from taxable income. What does that mean for you? The following types of compensation in a personal injury settlement are generally not taxable:
- Medical bills;
- Lost wages related to a physical injury;
- Reduced earning capacity due to an injury;
- Pain and suffering; and
- Any long-term disability or permanent impairment.
In other words, the vast majority of compensation included within a personal injury settlement is simply not taxable. The reason is that it is designed to ensure that the injured victim is made “whole.” The IRS treats these amounts as restorative rather than income. As long as the settlement arises from a physical injury, the compensation remains tax-free. You do not have to pay federal income taxes on your settlement.
A Note On State Law: South Carolina imposes a state income tax, so it matters whether your personal injury settlement is taxable at the state level. Fortunately for injury victims, South Carolina generally follows federal law regarding the taxability of damages arising from physical injury or physical sickness. Because federal law excludes those amounts from income, South Carolina does not tax the portion of a settlement that qualifies under that exemption.
Your Settlement Must Be For a “Physical Injury” or “Physical Illness” to Meet IRS Rules
It is important to emphasize that the IRS exclusion applies only when the settlement directly relates to a physical injury or physical illness. The physical nature is the key. Though that term is broadly defined, a car accident, truck collision, fall, dog attack, or other traumatic event qualifies. Medical documentation plays an important role. The records must show that the claimant suffered a physical injury that required evaluation or treatment. Pain, swelling, fractures, soft-tissue injuries, concussions, or internal injuries meet the requirement.
For injured victims in Spartanburg and elsewhere in South Carolina, it is important to understand that the exclusion from federal income taxes is not automatic. A settlement is presumptively taxable in the broad sense. It is only when it is for a physical injury or physical illness that the exception applies. In other words, your personal injury settlement documents should describe the damages as arising from a physical injury. Careful drafting prevents confusion and protects the tax-free status of the recovery. An experienced Spartanburg personal injury lawyer can help.
Note: Emotional distress damages may also fall within the exclusion when the emotional harm results from the physical injury. If you can prove you are getting emotional distress damages from a physical injury or physical illness in your settlement, that is not taxable either.
There is a Big Exception for Punitive Damages
Punitive damages are not awarded in most personal injury cases in South Carolina. It is relatively uncommon that they are part of a settlement. However, there are exceptions. They can be awarded, and they are sometimes included in settlements. The tax rules are different for punitive damages. Punitive damages are taxable under federal law. South Carolina law allows punitive damages in cases involving recklessness, willful misconduct, or conscious indifference to the rights of others. For example, punitive damages could be awarded as part of a DUI accident claim.
Punitive damages punish the wrongdoer rather than compensate the victim. The IRS classifies these damages as taxable income. The same rule applies even when the punitive damages arise from a physical injury case. Victims must report punitive damages on their federal return and may owe additional taxes at both the federal and state levels. If you have any questions about punitive damages as part of a personal injury claim, including about the potential taxability, an experienced Spartanburg personal injury attorney can help protect your rights.
The Bottom Line: In South Carolina, the answer to the question “Do I pay taxes on a personal injury settlement?” is usually “no.”
How Our Spartanburg, SC Personal Injury Attorney Can Help
Personal injury claims are complicated. The potential tax issues are just one of many considerations that need to be addressed. It is normal to have a lot of questions about your rights, your options, and what comes next in your case. At McCravy, Newlon & Clardy Law Firm P.A., we are a boutique personal injury law firm with decades of experience, many client testimonials, and a proven record of case results. You do not have to take on the claims process alone. With an office in Spartanburg and many other offices in Upstate South Carolina, we are here to help you get justice.
Contact Our Spartanburg, SC Personal Injury Lawyer for a Free Case Review
At McCravy, Newlon & Clardy Law Firm P.A., our Spartanburg personal injury lawyers have the experience you can trust. If you have any questions or concerns about a personal injury settlement and taxes, we are here as a resource that you can trust. Call us now or contact us online to set up your free, no obligation initial appointment.