No—personal injury settlements are generally not taxable in North Carolina. When you’ve been injured due to an accident or another person’s negligence, you may be entitled to compensation.
Personal injury settlements often cover medical bills, lost wages, and emotional distress that you experienced as a result of the crash. However, it’s important to contact a Charlotte personal injury lawyer who can help you understand how taxation applies to your case.
Under Which Circumstances Are Personal Injury Settlements Not Taxable?
As a general rule of thumb, compensation for personal injuries related to physical harm is not taxable at both state and federal levels. This rule also applies to situations where victims have been compensated for pain and suffering, emotional distress, or disabilities.
Physical Injuries
These three categories of compensation from personal injury settlements are usually not taxable in North Carolina:
- Bodily injury: If your personal injury settlement is related to physical harm—such as broken bones, head injuries, or other bodily injuries—you are typically not required to pay taxes on the settlement you receive.
- Medical expenses: If the settlement reimburses you for medical expenses associated with your injuries, this money is also not usually taxable.
- Lost wages due to injury: If you receive compensation for lost wages due to an injury that prevents you from working, the money you receive will generally not be taxed as income.
Pain and Suffering Damages
Compensation that you receive due to the pain and suffering you endured is often another part of your settlement offer that is typically not taxable. Pain and suffering damages compensate for the physical and emotional distress caused by your injuries.
As a result, this compensation is generally not subject to taxation.
Emotional Distress Related to Physical Injuries
Likewise, if your emotional distress is directly related to a physical injury or sickness, the damages awarded for emotional distress are generally not taxable. This includes anxiety, depression, or trauma that stem from your physical injuries.
Disability Payments
If you receive compensation in the form of disability benefits as part of your settlement, these payments are typically not taxable, provided they are associated with the injury or sickness. This may include long-term disability or loss of earnings due to the inability to work.
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When Are Personal Injury Settlements Taxable?
While the majority of personal injury settlements are not taxable, there are certain situations where a portion of your settlement might be subject to taxes. Let’s take a look at common situations in which personal injury settlements may be taxed.
Interest on the Settlement
Any interest that accrues on your personal injury settlement may be taxable. If your settlement includes an interest payment—which is common in cases where the settlement is delayed—you may need to report this interest as income.
However, please note that the principal amount for personal injury damages remains non-taxable if it’s related to your physical injuries.
Previous Tax Deductions for Medical Expenses
If you’ve deducted medical expenses related to the injury in previous tax years, any portion of the settlement that reimburses you for those expenses may be taxable. For example, let’s say you deducted medical costs related to the accident on your taxes.
However, you later received a settlement for those same expenses. In that case, the IRS may require you to pay taxes on that portion of the settlement.
Non-Physical Injury Settlements
Settlements for non-physical injuries—such as defamation, discrimination, or emotional distress unrelated to physical injury—are generally taxable. In these cases, the settlement is treated more like compensation for lost wages or business income.
Lost Wages Due to Non-Injury Causes
Any compensation you receive for lost wages that were not directly caused by a physical injury or sickness could be taxable. An example of this would be a situation where the settlement includes reimbursement for lost income from a car crash that didn’t involve physical injuries.
North Carolina-Specific Considerations
In addition to federal tax laws, residents of North Carolina must be aware of the state’s tax rules for personal injury settlements. The state follows federal guidelines with respect to the taxability of personal injury settlements, though there are important state–specific considerations.
North Carolina State Taxes and Personal Injury Settlements
North Carolina does not impose a state income tax on personal injury settlements that are intended to compensate for physical injuries, pain, and suffering, or emotional distress related to physical injuries. However, punitive damages are taxable at both the state and federal levels.
State Taxes on Interest and Lost Wages
Interest on personal injury settlements and lost wages—that are not related to physical injuries—are subject to North Carolina state income tax. The same rules apply as under federal law, where interest payments from a settlement or non-injury wage losses are taxable.
Deducted Medical Expenses
In North Carolina, if you previously deducted medical expenses related to the accident on your state taxes, you may need to report that portion of your settlement as taxable income if you later receive compensation for those expenses.
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Reach Out to a Personal Injury Law Firm in Charlotte for More Information About Settlement-Related Taxes
If you could potentially receive a settlement, you might find yourself wondering if your compensation will be taxable. It’s important to contact a Charlotte personal injury attorney who can advise you on the specifics of your circumstances.
Let the lawyers at DeMayo Law Offices explain the tax implications of your settlement. As Your North Carolina Law Firm™, our attorneys believe in People Over Profits™. After all, a right without a remedy is just a suggestion™.
The opportunity to pursue compensation without knowing how to do it isn’t helpful, but we’re here to help. Contact us as soon as possible to schedule a consultation and learn how we can assist you. And remember—you will not owe us anything until we secure compensation for you.
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