Mass torts are groups of lawsuits that allege similar accusations against the same defendants. The plaintiffs in mass torts allege that they have been harmed by the defendants. Most mass tort cases allege that the defendants caused physical injuries or sickness, thus making them personal injury cases.
Mass tort settlements often come after long-term emotional and physical suffering, so it’s understandable that plaintiffs will want to collect all the compensation they’re entitled to, minus any contingency fee that they pay their lawyer.
However, if you’re considering filing a mass tort lawsuit or have already filed one, you may be thinking about if your mass tort settlement will be taxable or not. Most of your mass tort settlement probably won’t be taxable, but parts of your settlement might be.
What Portion of Your Settlement Will Be Taxable?
Different damage types may or may not be taxable. At Nadrich Accident Injury Lawyers, we want to help you understand the process of filing a mass tort claim and what your settlement might eventually look like so you can make smart choices regarding your legal options.
With this in mind, this article will proceed to break down what types of damages in a mass tort settlement are and are not taxable.
Are Physical Injury or Physical Sickness Damages Taxable?
Are Mental Anguish or Emotional Distress Damages Taxable?
Are Lost Profits or Lost Wages Damages Taxable?
Is Interest on My Settlement Taxable?
Are Punitive Damages Taxable?
Are Property Damage Damages Taxable?
How Do I Reduce My Settlement Tax Obligation?
Are Physical Injury or Physical Sickness Damages Taxable?
The IRS states that a mass tort settlement with no itemized deduction for medical bills is non-taxable but deducted medical expenses must be included in reported income.
If your mass tort settlement includes compensation for physical injuries or physical sickness and you never took an itemized deduction for medical bills related to the sickness or injury in previous years, the full amount of your financial compensation for injuries or sickness is non-taxable, according to the IRS.
However, if you have deducted medical expenses in prior years and you receive a settlement for injuries or sickness, you must include in your reported income the part of the settlement that is for medical bills you deducted previously, to any extent these deductions gave you a tax benefit.
If part of the settlement covers medical bills that you paid over the course of more than a year, you need to provide a pro-rata allocation for the portion of the settlement for medical bills for each year you paid medical bills.
Are Mental Anguish or Emotional Distress Damages Taxable?
If the part of your settlement compensating you for mental anguish or emotional distress relates to mental anguish or emotional distress that was caused by physical injury or physical sickness, this part of your settlement is non-taxable.
However, if part of your settlement compensates you for mental anguish or emotional distress that was not caused by physical injury or physical sickness, this part of your settlement is taxable. However, the amount you need to include as income will be reduced by:
- The amount you paid for medical bills caused by mental anguish or emotional distress that wasn’t deducted previously
- Medical bills that have been previously deducted relating to anguish and distress that didn’t provide any tax benefit
Are Lost Profits or Lost Wages Damages Taxable?
You will have to pay taxes on the portion of your settlement that compensates you for lost wages. Since these damages are intended to replace any income you would have otherwise earned from working and would have been taxed for, the IRS and the State of California consider these damages taxable, and you will need to report them as income.
This will usually be the largest part of your settlement that you may have to pay taxes on.
Is Interest on My Settlement Taxable?
Interest on your mass tort settlement is considered “interest income,” and you must thus report it as income, as it is taxable.
Are Punitive Damages Taxable?
Most personal injury lawsuits do not result in punitive damages. However, punitive damages are sometimes awarded when defendants behave recklessly or intentionally destroy evidence. These damages are meant to punish defendants and discourage others from behaving the same way.
Punitive damages are taxable. They should be reported as “other income,” even if you received the damages in a settlement for physical sickness or physical injuries.
Are Property Damage Damages Taxable?
Some mass tort cases may involve property damage. An example would be a mass tort involving an automobile defect that causes many plaintiffs to crash their automobiles.
These types of damages are intended to reimburse plaintiffs for money they needed to spend to replace or repair their property, and these types of damages are typically non-taxable and do not need to be reported as income.
However, if you receive damages for a reduction in property value, and the amount you receive is more than your property’s worth, you need to report the difference as taxable income.
How Do I Reduce My Settlement Tax Obligation?
In some mass tort cases, you might allege multiple claims against the defendant. If you have a claim related to an injury or sickness and a claim that isn’t injury-related against the same defendant, the complaint your lawyer files for you needs to be extremely clear as to what claimed damages relate to each claim.
The damages awarded for the claim that is injury-related generally won’t be taxed, whereas the damages awarded for the non-injury-related claim will typically be taxable.
Nadrich Accident Injury Lawyers represents a wide range of mass tort clients in California. Most of our cases settle out of court because defendants fear us and know we’ll probably beat them in court.
However, obtaining a settlement that compensates you fully for your injuries while minimizing your tax obligations depends on finding the right lawyer to handle negotiations regarding any settlement.
Contact the Mass Torts Lawyers at Nadrich Accident Injury Lawyers
Our lawyers have been representing mass tort clients since 1990. We have a wealth of experience with complex issues that are tax-related regarding settlements reached out-of-court.
If you or someone you love require legal representation for a complex mass tort claim and are worried about any tax obligations you may face, contact us today for a free consultation or text us from this page. We don’t charge a fee unless and until we obtain financial compensation for you.
