Is Personal Injury Compensation Taxable?

Is compensation taxable?

In general, personal injury compensation payments are not taxable. However, for payments received as a result of a settlement or a court award for pain and suffering, the settlement amount may be taxable to the extent it exceeds payments for lost wages and medical expenses.

And, if you have gross income in excess of £100,000 from other sources, your personal injury settlement may be subject to federal income tax depending on how much you previously deducted for the expenses that resulted in the settlement.

When is tax payable on general damages?

The tax payable on general damages can vary depending on the circumstances. If the general damages are received in the form of an award or compensation, then it is possible that there will be no or very little tax due on these payments. The amount of tax which will be due on general damages can also depend upon what you are being compensated for. Some examples include medical expenses, illness, mental stress liability, etcetera. These are factors which may determine whether you need to pay tax and how much of a percentage will be taken from your award.

What about interest – is this taxable?

Interest income is taxable by the IRS. Examples of interest income are interest payments on your loan, dividends on investment, etc. If you need help, there are many tax professionals who can offer their assistance to you. They can also help you determine if you should defer some of your income to avoid higher taxes in the future.

Interest when compensation is invested

Interest on compensation received but not employed can be taxed by the United Kingdom. The interest is taxed as personal income, even if it is reinvested or lent to someone else. If you are receiving compensation for injury or disability, watch out about the tax rules covering the interest earned because this could change how much you are taxed.

Compensation received for personal injuries or damages is tax-free. However, compensation that is reinvested or lent to someone else can be taxed by the United Kingdom. If you are receiving compensation for injury or disability, watch out about the tax rules covering the interest earned because this could change how much you are taxed.

The person who has been injured receives a lump sum of money in a settlement through a court case against another party or insurance claim. The injured person may choose to receive his money from an attorney on a structured settlement basis which means he will get periodic sums over time instead of one large amount of money at once. In either case, if the injured party accepts any portion of his injury settlement as taxable income then he will have to pay income tax on that amount.

Taxation on personal injury trusts

The Personal Injuries (Compensation) Act 1969 provides for a personal injury compensation fund from which to make payments in respect of claims made under the Act. The fund is tax-free and can be drawn on to pay compensation.

Taxation on personal injury trusts

However, tax is levied on the way funds are created or accumulated. For example, any payment for lost earnings (employment income) made by the trustees of a personal injuries trust (PIT) to an injured person will be taxed as employment income in the hands of that person. Similarly, if dividends are received by a trustee on behalf of an injured person who is entitled to benefit from them, they will be treated as the latter’s income and so may be liable for taxation at source under PAYE rules.