Personal injury settlements in Minnesota are generally not subject to taxation. However, portions of a settlement awarded for certain types of damages may be taxed. For example, compensation for punitive damages, interest and emotional distress without physical injury must be reported as income for tax purposes. Consult with an experienced Minneapolis injury lawyer to understand your tax obligations as the recipient of a settlement in Minnesota.
The Majority of Personal Injury Settlements Are Not Taxed in Minnesota
Minnesota follows federal guidelines when it comes to the taxation of personal injury settlements. Under Title 26 § 104 of the U.S. Code, any damages or financial compensation received “by suit or agreement and whether as lump sums or as periodic payments on account of personal physical injuries or physical sickness” is not included as gross income for tax purposes. This means the majority of Minnesotans do not have to pay state or federal taxes on their personal injury settlements.
What Parts of a Personal Injury Settlement Are Taxable in Minnesota?
An insurance settlement or judgment award given for bodily injuries, including a workers’ compensation settlement, is not subject to taxation under the Internal Revenue Code. This includes compensation awarded for past and future medical bills, lost wages, property damage, and pain and suffering. However, there are exceptions to this rule in special circumstances.
Punitive Damages
Most personal injury settlements are made up of compensatory damages, meaning compensation awarded to make the victim whole again. However, another type of award known as punitive damages may also be available in cases involving gross negligence, intent to harm or a wanton disregard for the safety of others. Under federal law, these non-compensatory damages are taxable.
Emotional Distress Without Physical Injury
The federal tax exemption for personal injury payouts only applies to cases involving personal injuries or physical sickness, not emotional distress damages awarded for non-physical injuries. If a claimant receives compensation purely for emotional distress without any corresponding physical or bodily injury, this amount will be included in gross income for tax purposes.
Interest
Some settlement agreements in Minnesota include an amount awarded as interest due to a delay in the payout of an agreed-upon settlement. Any interest paid by an insurance company or defendant is considered taxable income by the Internal Revenue Service (IRS).
Medical Bills Listed as Deductions in Previous Tax Years
If you were dealing with your accident-related injuries for a while prior to the date that a settlement is reached, it is possible that you listed your related medical expenses as a deduction in a previous tax year. If this is the case, you will be responsible for paying taxes on any amount of your settlement awarded for the same medical expenses. This is the IRS’s way of preventing claimants from receiving double tax perks on the same medical costs.
How to Minimize the Taxation of Your Personal Injury Settlement
While most personal injury and wrongful death settlements in Minnesota are tax-free, circumstances vary from case to case. Whether or not you must pay taxes on your financial settlement depends on the situation, as certain types of compensation are taxable.If you need assistance navigating the taxation of your settlement, contact a personal injury attorney. A lawyer can structure your settlement to clearly mark each category of damages. This can help you understand your precise tax obligation and minimize the taxation of your settlement as much as possible.