A very common question that we get from our Las Vegas personal injury clients is whether or not the money they got from their personal injury settlement, often very large sums, is taxable as income. A valid question…your income from work is taxed. Rental income is taxed. What’s the difference, right? Fortunately, the proceeds from Nevada personal injury settlements are not taxable. To anyone reading this blog who is pursuing a Las Vegas personal injury claim or even considering it, that last sentence should bring you a sigh of relief!
The broad definition of income under the tax code would seem to include personal injury settlements as income. 26 U.S.C §61 defines income as “all income from whatever source derived.” That sounds pretty ominous and would appear to include pretty much everything. However, further down in the tax code in 26 U.S.C. §104 the tax code specifically excludes from gross income “amounts received under workmen’s compensation acts as compensation for personal injuries or sickness” and “the amount of any damages (other than punitive damages) received “whether by suit or agreement and whether as lump sums or periodic payments) on account of personal physical injuries.”
So unless you receive punitive damages, which are damages in a personal injury case that aren’t meant to compensate the personal injury victim but to punish the responsible party, then your personal injury settlement proceeds are not taxable. Most settlements do not include punitive damages. Most settlement for personal injuries are compensation for actual economic losses, such as lost wages, vehicle repairs, and medical bills, as well as compensation for pain and suffering.
So, this is a pretty simple topic to explain and understand. If your Las Vegas personal injury lawyer doesn’t have answers regarding your tax questions, you may have chosen an inexperienced personal injury attorney and should consider new representation.