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FAQ: Do I Owe Taxes on Money Awarded From an Injury Case?

December 10, 2023
Personal Injury Law

After sustaining an injury and then successfully recovering damages, the last thing that comes to mind is whether or not taxes are due on the money awarded. Having a personal injury lawyer representing you has likely resulted in a substantial award. After all, the amount you received should reflect the severity of your injury. Attorneys operate in many different areas of the law, but all are trained to represent your interests, and a serious injury deserves a serious award.

A personal injury case, where someone has been hurt through the negligence of another party, can be resolved in different ways. Two common ways of resolving a case are through a trial or through an out of court settlement. The first involves presenting the facts of the case, including details of the actual accident, to a judge and possibly a jury. The second method means that the Plaintiff’s injury attorney and the defendant’s counsel are able to negotiate an agreement as to an amount to be paid to the plaintiff.

Young colorado couple paying taxes after a car accident injury

In Colorado you should be represented by personal injury lawyer trained to handle cases for clients who have been injured in an accident. When an individual seeks to hire legal counsel to represent them regarding their injury, attorneys can be retained on two different bases: by the hour or on a contingency basis. Regardless of how the attorney is compensated, after an award has been secured for the clients, the plaintiff will receive monetary damages.

At this point, many plaintiffs believe, or at least hope, the matter is complete, and that they can get on with their lives. In reality, another issue arises: must taxes be paid to the government on money awarded to me as a result of the successful handling of my personal injury case?

Generally, income includes “…all income from whatever source derived…” and taxable income is “…gross income minus the deductions allowed by this chapter (other than the standard deduction).” There are lists of what should not to be included in gross income, including references to funds received as workmen’s compensation, damages (other than punitive damages) received as a result of personal physical injuries or physical sickness, and funds received through accident or health insurance for personal injuries or sickness.

However, tax laws are constantly being interpreted and reinterpreted in different ways. This is not an area that someone not trained in the nuances of tax law should attempt to navigate. The personal injury lawyer who represented you and helped obtain the award of damages for you in your accident case can provide guidance on the tax liabilities involved in your particular case.

Just as how a case is presented will vary according to each plaintiff’s type of injury, attorneys realize that tax obligation also vary with how the award is structured. If the tax matter is very complex and warrants the attention of a tax specialist, your personal injury lawyer will have a list of colleagues to whom you will be referred for advice on your tax liabilities.

When your personal injury lawyer has successfully brought your case to a close, be sure to consult with your injury attorney about the tax implications of your award. You do not want to have to face another course of litigation…this time with the IRS.

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