If you’ve received a personal injury settlement in Michigan, you may be wondering whether you’ll owe taxes on the money. Fortunately, most types of personal injury compensation are not taxable under federal or state law.
However, there are exceptions depending on how the damages are classified, so it’s important to reach out to a Troy injury attorney and tax professional for information about your specific circumstances.
How the IRS Classifies Personal Injury Settlements
The IRS typically distinguishes between compensatory and non-compensatory damages. Compensatory damages are meant to reimburse you for losses related to your injury, while non-compensatory damages serve other purposes, such as punishment.
According to IRS Publication 4345, most compensatory damages for physical injuries and illnesses are not taxable. That includes money you receive for:
- Medical expenses (if you did not take an itemized deduction)
- Pain and suffering caused by that injury
- Lost wages and loss of earning capacity (with exceptions for certain circumstances)
However, other parts of a settlement may be taxable, including:
- Interest earned while your case was pending
- Punitive damages, which punish the at-fault party rather than compensate you
- Pain and suffering awards not connected to a physical injury
It’s best to get legal advice before making any assumptions, as this is an especially complex area of the law. A personal injury lawyer can help you understand which portions of your settlement may be subject to taxation and advise you on the next steps.
Michigan’s Tax Treatment of Personal Injury Settlements
Michigan generally follows federal tax rules when it comes to personal injury settlements. This means your settlement will likely not be taxed at the state level if it compensates you for physical injuries.
For instance, if your case involved medical bills and pain and suffering due to a physical injury, those damages are generally exempt from Michigan income tax. However, the same exceptions apply as under federal law. This means that punitive damages awards can still be considered taxable income, among other exceptions.
If your settlement includes both taxable and non-taxable elements, it’s crucial to keep detailed documentation from your injury lawyer or the court explaining how your settlement was allocated. This can help you accurately report only what’s required when filing your taxes.
Consider Speaking With a Tax Professional
Although most personal injury settlements in Michigan are not taxable, it’s a good idea to consult with a tax professional. An accountant or tax attorney can help you determine things like:
- Which parts of your settlement are taxable
- How to document your claim properly
- Whether to set aside funds for any potential tax obligations
Proper tax planning ensures that you can keep as much of your settlement as possible while staying compliant with both state and federal laws.
Contact a Troy Injury Lawyer at Khamo Law for More Information About Your Case
If you have questions about how your personal injury settlement might be taxed, an experienced injury attorney can help as well. Khamo Law has over 20 years of experience and has recovered more than $30 million for clients across the state.
Our personal injury lawyers can explain how Michigan law applies to your situation and help ensure your financial recovery is fully protected. Contact us today at (248) 466-0606 or visit us online to schedule a free consultation with a Troy injury attorney and learn more about your rights and next steps.