If you or a loved one has been hurt in an accident, it’s important to understand the financial implications of any personal injury settlement or award you may receive. At Johnson and Taylor, our team helps personal injury clients throughout the state of Oregon recover the compensation they need and deserve. If you’re wondering whether a personal injury settlement is considered income and subject to taxation, we can help you understand how the law may apply to your case.
Is a Personal Injury Settlement Taxable in Oregon?
Monies received in a personal injury settlement are intended to make an injured party whole and compensate them for losses such as medical expenses, lost wages, and pain and suffering. Because the federal government considers these damages compensatory, a personal injury settlement is not typically considered income and is therefore not typically subject to federal income tax.
Similarly, the state of Oregon does not typically consider a personal injury settlement taxable and compensation doesn’t need to be reported as income on a state tax return. However, there are some exceptions, depending on the types of damages you receive. Certain exceptions apply in wrongful death cases as well.
When is a Personal Injury Settlement Taxable in Oregon?
Certain types of damages in a personal injury settlement may be considered income in Oregon, including:
Punitive Damages
Although most compensatory damages received in a personal injury settlement aren’t taxable, punitive damages may be subject to taxation. Unlike compensatory damages such as pain and suffering, punitive damages are intended to punish an at-fault party for particularly egregious conduct rather than compensate the injured party for their losses. Under federal tax law, punitive damages are considered income and must be reported on the recipient’s federal income tax return. Typically, Oregon also treats punitive damages as income that must be reported on a state tax return.
It’s also important to note that depending on the specific circumstances, non-economic damages such as emotional distress may be taxable if they are the only type of damages received in a personal injury settlement.
Payment for Previously Deducted Medical Expenses
If accident-related medical expenses are deducted on a tax return and later paid in a personal injury settlement, the amount deducted is considered taxable income. Generally, this applies on both the federal and state levels.
Interest Income
In some cases, interest on damages in a personal injury settlement is taxable at both the federal and state levels. This means that any interest earned on a personal injury settlement is considered income and must be reported on tax returns.
Figuring out what may be taxable in a personal injury settlement can be confusing. Each situation is unique, so it’s important to consult with your personal injury lawyer and a financial professional such as an accountant to clarify your tax liability.
Types of Personal Injury Settlements
Lump Sum Settlements
A lump sum settlement is a one-time payment that encompasses all damages in a personal injury claim. If punitive damages are part of your settlement, they must be reported to the Internal Revenue Service (IRS) and the Oregon Department of Revenue. Additionally, if you decide to invest settlement funds, any interest earned from the investment may be taxable.
Structured Settlements
In a structured settlement, payments are spread out over a predetermined period of time or in a series of scheduled payments. Structured settlements can be beneficial in cases involving long-term medical care and other ongoing expenses. Generally, both the principal and earned interest in a structured settlement annuity are tax-exempt. Again, these issues are complex, and it’s best to consult with a personal injury attorney and tax professional to maximize the proceeds you receive from a settlement and minimize tax liability.
Does a Personal Injury Settlement Affect Child Support Payments in Oregon?
If you’re up to date on child support payments, generally, receiving a settlement won’t automatically increase the amount of child support you owe. However, Oregon takes the financial support of children very seriously, so if you’re in arrears or have a child support lien against you, your settlement can be garnished for outstanding payments. It’s also important to keep in mind that punitive damages and interest from a settlement can be considered income, and may affect your child support payments.
If you’ve been injured and you’re unable to pay child support while your case is pending, make sure to consult a family law attorney who can help you file for a child support modification to avoid being held in contempt of court. Our divorce and family and estate planning and probate lawyers serve clients in Marion, Polk, and Linn County and other surrounding communities.
Contact a Personal Injury Lawyer in Salem, Oregon
At Johnson and Taylor, we understand that figuring out the financial implications of a personal injury settlement can be stressful. We’re here to help you through the process and offer straightforward legal advice you can trust. Contact us or call 503-990-6641 to schedule a consultation with a personal injury attorney in Salem today. Our personal injury lawyers serve clients in Salem, Eugene, Bend, the Oregon Coast, Medford, and throughout the state of Oregon.