One of the first questions many people have when receiving a personal injury settlement is whether or not the financial proceeds are taxable or attachable. Just because a settlement is not taxed does not mean that a personal insurance company will not attempt to recover the money they have paid for medical bills during the time a case was being negotiated with a negligent respondent or their insurance company. There is a definite chance that some portion of a damage award may be confiscated before payment. This is termed a “lien” by a personal injury law firm, and it can indeed be applied in some cases. And there could also be taxation implications as well regarding some portion of any settlement or damage award by a jury. A personal injury law firm can sometimes stop certain attempts at confiscation, but not always. 

Understanding Claim Damages

All personal injury claims will be itemized according to the classification of damages. Those classes are special economic compensatory, general non-economic compensatory, and punitive damages that are assigned by a jury in serious gross negligence cases. Compensatory damages are paid based on the imposition and ongoing problems dealing with the injuries in the future. These are never considered income by the Internal Revenue Service because they are essentially financial recovery for lost mobility and good health had the injury not occurred. Financial recovery for lost wages could be considered income in some instances, but your personal injury law firm may be able to include it as a component of the general non-economic damage settlement or special classification by the court. These funds cannot be attached by the government as income. However, punitive damages can pose a problem as well as interest on money that is paid over time. 

Punitive Damages and Accrued Settlement Interest

The component of an award that is taxable is the punitive damage amount awarded by a jury in a trial verdict and any interest that is accrued for payments that are paid by installment over time. This happens more often than many people realize, but sometimes it is necessary for whole compensation to be recovered. Punitive damages are not compensatory by nature but are punishment applied to the defendant for egregious negligence. They are always considered income by the IRS and state treasury departments. And, the tax liability can be excessive. This means that restructuring the funds in the form of non-taxable financial entities may be necessary to at least reduce the tax liability burden. Interest on installment payments is also taxable income, but not the primary withheld funds unless they are considered punitive damages. 

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Insurance Subrogation

Subrogation is the legal term for the process of financial recovery for private or employer insurance coverage that pays medical bills for injured policyholders prior to the settlement of an injury claim. Some injured parties are insured and medical bills are reimbursed to them from the respondent insurance company that is liable for damages payment. Sometimes these payments are recoverable and sometimes they are not. When a settlement is finalized and no terms are allowed for public information, it is difficult for the paying insurance company to recover the funds. Plus, there is an argument that the insurance is part of employment compensation, which could also make them exempt from recovery. An aggressive and experienced personal injury law firm will know how to classify any settlement payments with anonymity when the claim is finalized. 

Court Damage Reductions and Lien Application

Cases that go to trial may be a problem when associated financial recovery motions have been filed with the court. Trial outcomes are typically public record, and liens may be filed with the court that a judge will be obligated to authorize. These funds will be deducted from any damage award, but possibly not from a settlement. However, punitive damages can only be awarded by a jury. Insurance companies will only be responsible up to the maximum limits of a defendant’s policy maximum. The best part of this situation is that many defendants will want to avoid a trial because they want to avoid punitive damages, and this desire can be used as leverage to increase a settlement amount to keep the matter private. This works to everyone’s advantage except the government and potential insurance companies wanting payment recovery. It is also important to remember that some judges have the authority to reduce a punitive damage award when the jury has been too sympathetic and ultimately too generous in an award. Additionally, there may be caps on damages in certain cases like medical malpractice. This is a de facto interception of financial recovery just like taxation. 

Your Personal Injury Law Firm Should Know This Possible Outcome

This payment avoidance is just another reason why it is always vital to have the right attorney handling your personal injury claim. Whole damage recovery is always the goal regardless of what entity is after a portion of the lawsuit proceeds. Our law firm always provides comprehensive representation, including protection assistance from taxation and potential creditors. Always retain a legal representative for optimum outcome. Start today by scheduling a free case review with one of our personal injury attorneys. We have multiple locations around North Carolina, including New Bern, Jacksonville, Rocky Mount, Greenville, Raleigh, and more. Contact us now – call 1-800-ACCIDENT or use the link below.

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