Are Personal Injury Settlements Taxable in California?

Are Personal Injury Settlements Taxable in California?

When you obtain a personal injury settlement in California, the entire sum is not subject to taxation by the state.

Instead, California only levies taxes on the portion of your settlement that serves as compensation for your financial losses.

The taxation rate is determined based on the state’s highest marginal tax rate, which presently stands at 13.3%.

Securing a personal injury settlement represents a significant milestone in your recovery journey following an accident caused by someone else’s negligence.

The funds you receive can assist in covering medical expenses, lost income, and provide reparation for the pain and suffering resulting from your injuries.

Nevertheless, it’s crucial to be aware that you might have tax obligations related to a personal injury settlement concerning both the IRS and the state of California.

Explore the tax implications of personal injury settlements and discover how the Shirvanian Law Firm can assist you in minimizing your tax liability on your compensation.

An image illustration of personal injury settlements taxable in California
Are personal injury settlements taxable in California
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Is a Personal Injury Settlement Subject to Taxation?

In the majority of instances, personal injury settlements are not subject to taxation.

Nevertheless, the IRS tax code does contain provisions that allow for taxation under specific circumstances.

Indeed, in most scenarios, your personal injury settlement can be subject to taxation according to the IRS and California regulations.

The IRS delineates its guidelines for taxing personal injury settlements in Publication 4335, which specifies the taxable and non-taxable components of such settlements.

In California, the state’s Franchise Tax Board (FTB) imposes taxes on certain portions of received settlements, categorizing them as a form of income.

The taxation of personal injury settlements by the FTB closely parallels the requirements set forth by the IRS.

The Federal Taxation Applied to a Personal Injury Settlement

Although you can generally retain the majority of your personal injury settlement without facing taxation.

The IRS imposes taxes on specific types of damages within the settlement:

  1. Deducted Medical Expenses: You are required to pay taxes on medical expenses that you deducted on your previous year’s taxes as itemized deductions, provided these expenses were paid more than a year ago. Typically, you will pay proportional taxes on the deducted expenses.
  2. Non-Economic Damages: You won’t owe taxes on funds received for mental anguish or emotional distress resulting from physical injury. However, there may be tax obligations if these damages were awarded for other reasons, such as witnessing a car accident.
  3. Lost Wages: If you receive compensation for lost wages, you are responsible for paying taxes to cover the Medicare and Social Security contributions you would have made if you had earned these wages through regular employment.
  4. Excess Property Damages: Settlements addressing property damage are generally not subject to taxation. However, if you receive damages that exceed the adjusted basis value of your property, you must report these earnings as regular income and pay applicable taxes.
An image illustration of Taxability of Personal Injury Settlements in California
Taxability of Personal Injury Settlements in California
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Is a Personal Injury Settlement Taxable in California?

Similar to your obligation to declare specific portions of your settlement as income to the IRS.

You also need to report this information to California’s FTB (Franchise Tax Board).

The FTB provides instructions to California residents on how to report their income to prevent incurring fines and penalties.

Since the taxable segments of your personal injury settlement, like the compensation you received for lost wages, are categorized as income.

It’s advisable to become acquainted with the state’s guidelines for reporting income when you receive a settlement award.

Is Taxation Applicable to Personal Injury Settlements Involving Punitive Damages?

Punitive damages are infrequently awarded in California.

However, if you do receive punitive damages, it is imperative to inform the IRS and classify them as additional income.

Punitive damages are subject to full taxation, just like any interest you may earn on your settlement.

Frequently asked Questions

  • How are personal injury settlements determined in California?
  • Is there taxation on wrongful death settlements in California?
  • What occurs to a settlement if an individual passes away in California?
  • What is the typical amount for a wrongful death settlement in California?
  • Are death benefits subject to taxation in California?
  • Do survivor benefits incur taxes in California?

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