Are Louisiana Personal Injury Settlements Taxable?

December 23, 2020 Announcements and Law Updates

Are Louisiana Personal Injury Settlements Taxable?

 Generally, personal injury settlements in Louisiana are not taxable at either the federal or state level. However, there are some exceptions and legal nuances. Thus, it is important to retain Louisiana personal injury lawyers with proven experience in personal injury settlements and litigation — like those at Mansfield, Melancon, Cranmer & Dick LLC. Experienced Louisiana personal injury lawyers are fully aware and up-to-date on these taxing rules, exceptions, and nuances. As such, sometimes, settlements can be tailored to minimize the taxable consequences.

Why are Louisiana Personal Injury Settlements Non-Taxable?

Personal injury settlements are mostly non-taxable because, basically, the Internal Revenue Service and the state taxing authorities do not consider settlements and/or personal injury judgments to be “income.” Rather, settlements and judgments are compensation meant to make the victim “whole” again as though the accident never happened.

What is the Difference Between “Income” and “Compensation?

To understand the difference between income and compensation, let’s examine a hypothetical example involving broken kitchenware. Imagine you go to the local Dillard’s and buy a new covered baking casserole dish for $100. Now, imagine that your neighbor comes over for a visit and, accidentally, knocks the new dish off the counter and it shatters into pieces. Your neighbor is very apologetic and offers to buy you a replacement dish or to give you $100 as compensation. As can be seen, if you accept the $100, there is no “income.” That money merely makes you “whole” after the destruction of your property. That is compensation, not income.

In the same manner, mostly, there is no “income” if you settle a personal injury case or receive a judgment after trial. Most of the damages that you can recover are legally termed “compensatory” damages. They compensate you for your losses such as medical bills, damage to personal property (like your car) and more.

Exceptions

 However, as noted, there are certain exceptions to the general rule of non-taxability. The most noteworthy involves lost wages or salary. Often, victims of Louisiana auto accidents lose some time from work while they are recovering and recuperating from their injuries. A victim of negligence can recover lost wages/salary as part of a settlement or lawsuit. Because wages and salary are normally taxable, if an accident victim recovers those types of damages, the IRS and Louisiana considers that portion of the settlement to be “income.” Therefore, such amounts are taxable.

Another exception involves punitive damages. In some cases, the at-fault party engaged in egregious and particularly reprehensible behavior. In those types of cases, punitive damages can be awarded. But, punitive damages are NOT compensation. They are damages awarded that PUNISH the at-fault party for their bad behavior. Taxing authorities consider such damages to be other than compensation. As such, an award of punitive damages is taxable. Other exceptions involve certain types of emotional injuries that do not result from a physical injury. Further, damages awarded for certain physical symptoms deemed to be the byproduct of mental injuries are not considered “compensatory.” Finally, interest that might accrue on a verdict is considered taxable.

Mansfield Melancon Attorneys can Help

If you have been injured in Louisiana by the negligence or wrongdoing of another, contact the Louisiana personal injury attorneys at Mansfield, Melancon, Cranmer & Dick LLC. We have proven experience with many types of personal injury cases including Louisiana automobile accidents. Contact us by calling one of our offices: New Orleans at (504) 500-1108, Baton Rouge at (225) 612-0800, or Lafayette at (337) 409-0003. You can also request a free consultation by using our “Contact Us” page.