Insurance Settlement Tax Question

[Rodes]

s About Taxes)/insurance settlement tax question Advertisement Expert: Neil Johnson(The Tax Dude®) - 2/1/2008 Hello my name is Marco I was in a car accident in May of 2005. In Gilbert Arizona where I reside. I finally came to an agreement on the amount just a couple of days ago and I will be receiving the settlement check in a couple weeks and I would like to know if it is going to be taxed if I do not structure my settlement.

[hardin]

Marco,

One of the most basic tenets of tax practice is that if money received merely returns you to your original starting point, if it just makes you "whole" again, it's not "accession to wealth," and it is not income.  For years, that seemed reasonable until the Small Business Job Protection Act of 1996 changed all the rules.

The big rule change on personal injuries is this: Unless the injury is physical, any settlement or award is taxable. That makes awards for discrimination, emotional distress and/or injury fully taxable(even though these awards are intended only to make you whole again). For a verdict or settlement to be tax-free, it must be structured to meet two new code requirements:

1.  A physical injury or illness must have occurred. Without either, the proceeds will clearly be taxable.

2.  The injury or illness must be the result of a tort(a wrongful act, injury or action). If you successfully sue someone who hit your car, the award will be tax-free. I hope this helps answer your questions.

Regards,

Neil Johnson

The Tax Dude™

www.thetaxdude.com

[email protected]