Sometimes cases are settled out of court. If it is a good decision or not is another debate on its own. Only an experienced Santa Ana personal injury attorney can completely explain what you are getting into. Every year and everyday cases are being settled out of court. Is that secretive? And is the settlement taxable?

The questions must have arisen with the belief that everything is taxable, from your earnings as a worker to the sales of properties. 

Many people will agree to settle out of court. This will save all parties a lot of time, money, and stress. While some believe that the financial obligation is complete once they pay attorney fees, that is not the case. When the settlement comes in, so will the IRS.

Initially, before you settle out of court you should consult a Santa Ana personal injury attorney with a lot of experience (the more years of experience, the better). The attorney understands your fears too, like how you worry about tax payment after the whole process. The truth is the tax depends on the type of damages and the amount paid as settlement. No matter how complex the case might be, the attorney (with a lot of experience) should be able to provide a lot of help.

The process of settling out of court

The overarching reason why cases are resolved out of court is quite simple: it is faster and less expensive for both parties. Each of the parties has its own personal benefits of settling out of court. First, the plaintiff can earn less than she would get if the case gets to court, but, like a Santa Ana personal injury attorney will tell you, settling out of court will be faster than waiting for the verdict of a court. Secondly, the defendant has agreed to the fault and is likely to pay less than what they would have paid if the hearing is happening in court.

Before agreeing on the amount to pay as settlement, the two parties will examine the damages in the claims critically and make an allocation for each of them. There are various kinds of damages, and each has its own tax implication. Under the Small Business Job Protection Act (SBJPA) of 1996, the settlement of damages in personal injury and personal sicknesses are among the list of taxable settlements. Businesses are not in the list because businesses do not suffer physical injuries in any way, so the rule doesn’t apply. Taxation, therefore, only apply to individuals.

Treatments of settlements and awards

Because the various types of damages have different origins, the damages are taxed based on their specific origins. A Santa Ana personal injury attorney will let you understand that certain damages have their ways of treating the settlements and then the process of tax. Basically, injuries that are physical will not be taxed. To put that in a legal term, they are tax exempt. For instance, if an accident happens and the injured suffered a severely broken arm. The amount paid as compensation for this physical injury will be tax exempt. However, there are exemptions which you must familiarize yourself with such as 

Physical injuries and illnesses

As said earlier, many of the types of common physical injuries and illnesses qualify as tax exempt. Once the damages are proved to be under personal physical injuries they are classified as tax-exempt. They include

•    The medical bills of the immediate and the future rehabilitation or treatment of the injury or sickness

•    The amount loss as income during the time of recovery from the sickness or injury. This also includes the amount paid for loss of potential to work if the accident causes a permanent deformity, making the injured party unable to work again

•    Sufferings and pains are also tax-exempt, but there is a different rule for cases of emotional distress.

•    The fee paid to the Santa Ana personal injury attorney is also exempted

Why are the majority of personal injury claims tax exempted

Looking at the list carefully, all issues related to personal physical injuries and illnesses are exempted from taxation. The defendant payment of settlement is not taxed for any reasons except there is a case of emotional distress. Why?

The motive of making most of the case tax-free is to make the injured regain what they have lost without any further constraint – at least not from IRS. The IRS understands that the damages should be compensatory. In a better sentence, they believe the plaintiff should regain or be back as she should be if the accident did not happen. Exempting all recoveries from taxation is, therefore, their attempt to help.

Generally, many people will keep settlements done outside the walls of the law court as a secret. Once completed, it becomes just an agreement, a secret between the defendant and the plaintiff. But another formula applies when there is a case of emotional distress.

Emotional distress and taxation

Medical bills and hospital fees are tax exempt. Emotional distress is also a product of physical injuries and illnesses; it is a psychological pain derived from physical injuries. This other type of pain is tax exempted too, but they will be taxed when there is compensation above the medical bills.

Here’s an example to make things clear

Assume the medical bills for the treatment of the broken arm is $10, 000. Agreeably, the Santa Ana personal injury attorney of the victim says that the compensation should be more than that, putting evidence forward. Now, the $10, 000 will be tax exempt, but any additional amount paid will be taxed.

It’s a challenging case

Emotional distress is not easy to prove. The Santa Ana personal injury attorney will put a lot of work and the final amount to be paid is in the hands of the jury. What most attorneys do is to find a witness who can testify in court that there is emotional distress. This is also a tricky and time-consuming move; the witness must be able to show the psychological extent of the damages and the jury must be convinced enough to allow the award of compensation.