Navigating US Personal Injury Compensation: What's Taxable and What's Not
Personal injury compensation in the US is complex, with different rules for taxing various parts of a settlement. The Internal Revenue Service (IRS) and local tax offices (Finanzämter) decide the tax burden based on applicable laws.
Compensation can cover a wide range, from past and future medical bills to lost income and psychological pain. The IRS exempts damages resulting from personal physical harm from gross income, as per IRC Section 104. However, not all parts are exempt.
Structured and lump-sum settlements are handled similarly. While the goal is to make you 'whole' again, not all compensation is tax-free. Punitive damages, meant to penalize the defendant, are taxable. Accrued interest may also be subject to taxation. Tax offices determine the final tax burden based on these rules.
Personal injury compensation is not always tax-free. While damages for personal physical harm are exempt, punitive damages and accrued interest may be taxable. Tax offices decide the final tax burden based on applicable laws. It's crucial to understand these rules to plan your finances effectively after receiving compensation.
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