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Settlements that are received for personal injuries are not taxable income to the recipient. Some settlements of this nature include payments for both compensatory damages and punitive damages.
Compensatory damages are those which are being paid in direct connectin with the physical injuries incurred. Punitive damages are damages which are assessed against a plaintiff as a deterrent so that the plantiff is discouraged from continuing such practices in the future, but are not directly related to the physical injury part of the settlement.
If any part of the settlement amount you received was classified as puntive damages, then that portion only would need to be included in your taxable income. But if all of the damages awarded were for a compensatory (for personal injuries) settlement, then none of that is taxable income to you.
You should receive paperwork from the payor which indicates the breakdown of the settlement amounts which were paid, or you would need to contact the firm which handled this settlement to obtain that information. If any of the settlement amount is taxable, you should also receive a 1099 form at the end of the year which reports the taxable amount.
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Thank you Shorty
Thank you. Just to be clear, I am the daughter, my mother was the one named in the suit. So if I understand your response, the "money" as compensatory is not taxable ... independent of who it is distributed to through the will?
Hello again Shorty,
Techinically the settlement amount becomes part of your mother's estate. But since your mother passed away 11 years ago and the proceeds are being paid to you, then the income is still not taxable.
If all of the damages were compensatory, then if your mother would have still been alive at the time the settlement was made, this would not have been taxable income for her. The nature of the settlement retains its same non taxable character even though the settlement is now being paid to you on her behalf.
Thank you A couple of more questions, is there a State type of Tax implication? I live in Texas that has no state income tax.
Any other taxes on this money for Texas? Do we have to file any other forms in Texas?
Thanks for being helpful,
There would be no state tax implications at all since you live in TX which does not impose an income tax. So even if part of this settlement is for punitive damages, that portion of the settlement is only subject to federal taxes.
There are no special forms or any forms at all that need to be filed with the state or with anyone else. The only thing you will need to do is include any punitive damages as part of your taxable income on your federal tax return. If all of the damages were for compensatory damages, then nothing needs to be reported on your tax return and no forms need to be filed.