Are Slip and Fall Settlements Taxable?

Before you learn more about how taxes influence the amount of money that you receive from a legal settlement, you should first discover the pros and cons of the two types of legal settlements.

Lump-Sum

As the more common type of legal settlement, a lump-sum arrangement represents a one-time payment that covers the entire value of a settlement. You receive the lump sum after your personal injury attorney accounts for several expenses, including the taxes owed to the state and federal government. If you decide to accept a lump-sum settlement payment, the legal process immediately concludes. You do not have to worry about budgeting for monthly payments, as well as fall victim to the negative financial impact of inflation. If you consider yourself skilled at managing money, then accepting a lump-sum legal settlement arrangement is the way to go.

Structured

A structured legal settlement involves receiving a series of payments over a designated period, which can last as short as several months or more than 10 years. The most negative impact of accepting a structured legal settlement is the money you receive at future dates is devalued by inflation. If you win a large legal settlement and you do not consider yourself skilled at handling personal financial matters, then accepting a structured settlement makes the most sense. You can create monthly budgets that account for a steady stream of income until you run out of settlement cash.

When you file a civil lawsuit that seeks monetary damages, you can seek three common types of compensation: economic, non-economic, and punitive damages. If a loved one dies because of an act of negligence, you also can seek wrongful death damages. If you and your slip and fall lawyer settle your case out of court, you cannot seek punitive or wrongful death damages. Instead, you seek compensation that covers the costs associated with economic and non-economic damages.

Economic Damages

Economic damages represent the tangible costs associated with your case. Medical bills by far constitute the highest valued type of economic damages, with the costs of diagnostic tests, treatment programs, and physical therapy sessions running into thousands of dollars. You also have the right to seek compensation for lost wages, property damage, prescription medications, and the use of an assistive device.

Non-Economic Damages

Unlike the tangible costs that define economic damages, non-economic damages do not come with a price tag. The result of some personal injury incidents can be the development of emotional distress issues, such as fear, anger, and depression. According to the judicial system, the development of emotional distress issues is considered to be a part of pain and suffering. Your slip and fall lawyer calculates a fair value for non-economic damages by referring to a formula that factors in the value of economic damages.

After receiving a favorable legal judgment or reaching a settlement with another party, many plaintiffs that file civil lawsuits are surprised to discover they have to pay taxes on the financial value of a settlement or legal judgment. How much you owe in taxes after a settlement depends on the type of settlement. In most cases, a plaintiff that reaches a settlement has to pay taxes on the monetary value of the settlement. However, personal injury cases are different because some of the money awarded in a settlement does not represent income. Instead, some of the money earned in a legal settlement represents one or more expenses.

What Parts of a Settlement Are Taxable?

The judicial system defines taxable settlement money as income. First, you must pay taxes on any lost wages granted from a settlement. The judicial system views lost wages as income you would have earned had you not sustained one or more injuries as a result of a slip and fall accident.  You receive a W-2 for the value of lost wages, and then the IRS withholds both FICA and income taxes from the value of the W-2. Second, if you earned interest on an unpaid settlement, you must pay income taxes on the interest generated from the unpaid settlement.

What Parts of a Settlement Are Tax-Exempt?

Tax-exempt settlement awards consist of what the IRS considers to be reimbursements for the expenses you had to take care of before settling your case. Medical bills represent the most substantial tax-exempt settlement award. All the money you paid out-of-pocket for medical expenses does not get taxed at the federal level. The value of pain and suffering also is considered an expense that is tax-exempt as part of a settlement. One exception to the pain and suffering rule is if you did not sustain any physical injuries, which the IRS then considers your pain and suffering award taxable.

Most personal injury attorneys prefer to negotiate a settlement because going to trial is a costly and time-consuming process. Negotiating a settlement allows you to receive similar compensation, without having to go through a complex trial that causes you considerable stress.

Calculate a Fair Settlement Value

The fastest way to derail negotiations to reach a settlement is for your slip and fall lawyer to submit an unreasonable offer for compensation. Calculating tangible expenses like medical bills is easy to do, but calculating a value for non-economic damages can be the issue that ends negotiations.

Craft a Demand Letter

A demand letter notifies the other party’s attorney that you are ready to negotiate a settlement. The demand letter should include a detailed description of what transpired before, during, and after the slip and fall incident. Your slip and fall lawyer also mentions the types of physical evidence collected, as well as the accounts provided by witnesses. The most important part of a demand letter is the section explaining how your attorney calculated the value of the settlement offer.

Start Negotiations

The other party can either accept or reject the initial offer presented by your slip and fall lawyer. If the other party denies the initial offer, your case can move to the trial phase of the litigation process or the other party sends back a counteroffer. A series of counteroffers can follow until both parties reach a settlement or decide to take their chances on a civil trial.

Hiring a slip and fall lawyer who understands the tax implications of a legal settlement helps you avoid any trouble with the IRS. However, your attorney should bring other credentials to the table as well.

Experience matters, but only if your lawyer has amassed a proven record of success helping clients recover from the financial losses caused by a slip and fall incident. You should search for a personal injury attorney who specializes in handling slip and law cases. The slip and fall lawyer representing you should be willing to negotiate a settlement to keep your case from going to trial. Some personal injury attorneys refuse to negotiate favorable settlements for clients.

Because of the complex nature of a slip and fall case, your slip and fall lawyer should be a responsive communicator. This means promptly returning emails, phone calls, and text messages. The attorney that you hire should represent you during every step of the litigation process, from the day of the free case evaluation to the day your case gets resolved.

At Morgan and Morgan, our slip and fall lawyers check every box for the qualities to look for in a highly-rated attorney. 

Learn more by scheduling a free case evaluation with a slip and fall lawyer from Morgan and Morgan.