Are Punitive Damages Taxable? Here’s What You Need to Know

In a lawsuit, the amount of money an accident victim receives can be classified as either compensatory damages or punitive damages. When you receive financial compensation from a lawsuit, it is important to be aware how much money was awarded as compensatory damages and how much was awarded as punitive damages, as these are taxed differently by the Internal Revenue Services (IRS).

What are Punitive Damages?

Punitive damages are meant to punish the defendant for their actions and deter them from engaging in similar conduct again. Punitive damages may be awarded in addition to compensatory damages in a personal injury lawsuit.

Punitive damages are typically only awarded in cases where the defendant’s conduct was particularly malicious. Common situations where punitive damages are awarded include distracted driving or driving under the influence. In both these situations, the negligent party decided to engage in dangerous behaviors. Punitive damages are also commonly awarded in product liability cases when a company knows of defect and fails to warn the consumer of harm. They are meant to send a message that this type of behavior will not be tolerated and to deter others from engaging in similar conduct.

In determining whether to award punitive damages, and an amount, the court will consider several factors, such as the severity of the defendant’s actions, the financial resources of the defendant, and the impact of the damages on the defendant.

Are Punitive Damages Taxable?

Punitive damages are considered taxable income. This means the recipient of punitive damages must report the amount of the award on their tax return as “other income” and pay income tax on the money they receive. Since compensatory damages are not taxable, it is important to know the amount of compensatory and the number of punitive damages you receive to properly file your taxes.

What Are Compensatory Damages?

Compensatory damages are intended to compensate the accident victim for the losses they have suffered because of the negligence of another party. These damages are intended provide compensation to the injured party and put them in the financial position they would have been if the accident had not occurred. There are two types of compensatory damages: general damages and special damages.

General damages are non-economic damages such as pain and suffering, emotional distress, and loss of consortium. General damages can be hard to calculate as there is no exact dollar amount to assign. It is important to work with an experienced personal injury lawyer at The Barnes Firm to recover the compensation you deserve for general damages.

Special damages are damages that are more easily quantifiable, such as medical expenses, lost wages, and property damage. These damages can be calculated by determining the sum of total loss of the victim based on evidence, such as medical bills and pay stubs.

The goal of compensatory damages is to make the injured party whole again by providing them with the financial resources they need to cover the losses they have suffered because of another person’s negligence. Compensatory damages are not taxed in New York or California.

Speak with a Trusted Attorney at The Barnes Firm Today

It is important to note that the tax treatment of damages can be complex, and it is always a good idea to consult with a tax professional or attorney to understand the tax implications of any damages you may receive.

For more information regarding personal injury cases, contact The Barnes Firm today at (800) 800-0000.

Richard Barnes – President of The Barnes Firm

Richard Barnes: “As President of The Barnes Firm, I have dedicated my career to achieving justice in hundreds of cases for the victims of injuries caused through the fault of others. Additionally, I have been honored to have been elected Best Lawyer and a Super Lawyer”

Years of Experience: 30+ years
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