Tax season, which is now upon us, is, for most people, about as fun as sticking a fork in your eye. But your Central New York personal injury lawyer brings good tax news for personal injury victims! You’ve all heard the refrain, “nothing is certain except death and taxes”. That’s definitely true for death, but not always so for taxes, at least not for personal injury victims. Let me explain.
Many of my injured clients are pleasantly surprised to learn they don’t have to pay income tax on their personal injury settlements. This is because compensation for pain and suffering is not considered “income” but rather money to replace a loss suffered. In other words, the loss + settlement = a net wash, i.e., no income earned.
Another thing our clients are sometimes surprised to learn is that they can avoid paying tax even on interest they earn on their settlement money. How? Well, If you take the money in a lump sum (cash), and place it in the bank, and earn interest on it, you must pay a capital gains tax on the interest earned. But if you instead take a “structured settlement“, you can earn the same or even more interest tax free! Assume, for example, you get a $100,000 net settlement and elect to have it “structured” so that you earn an extra $10,000 on it. The insurance company pays you $10,000 a year for 11 years for a total $110,000 in payments ($10,000 of which corresponds to interest earned). Normally, you have to pay a capital gains tax on interest earned, but not if you earned that interest on a structured settlement! That’s because technically the insurance company that structures your settlement money “owns” the money while it is cooking up the interest (you are not earning it – they are!) and pays you only after the interest is generated. A gimmick, yes, but a legal one that helps you keep all the interest you earned on your settlement money.
So if you are not planning on spending your personal injury settlement compensation right away, but instead are planning on investing it or spending it slowly over time, you ought to consider a structured settlement so as to avoid paying taxes on the earned interest. It’s a no-brainer!
Bottom line: While death is certain, taxes are not, at least not in the world of personal injury settlements.
Email me at: firstname.lastname@example.org I’d love to hear from you!
Michael G. Bersani, Esq.
mbk-law.com Central & Syracuse NY Personal Injury Lawyers Michaels Bersani Kalabanka