Tax Consequences of a Personal Injury Settlement

Have you been injured in a car accident?

Hopefully you have been financially compensated for your injuries through a settlement, but the last thing you want to do now is have to pay taxes on this money.  The good news is that you likely won't have to.

Whether your settlement is taxable depends upon how the settlement is classified.

Personal Injury
If you receive a settlement for personal physical injuries, and did not take an itemized deduction for medical expenses related to the injury in prior years, the full amount is non-taxable.  However, if you claimed medical expenses related to the injury in a prior year, you must include that portion of the settlement in income.

Emotional Distress or Mental Anguish
If a portion of your settlement is for emotional distress or mental anguished originating from a personal physical injury, then it too is non-taxable.  However, the emotional distress or mental anguish must originate from a personal physical injury.

Lost Wages
If a portion of your settlement is for lost wages, that portion is fully taxable.

Property's Loss-in-Value
The taxable portion of a settlement relating to your property's decrease in value depends upon your basis in the property (original purchase price less any allowable deprecation).  If the decrease in value is less than the adjusted basis of your property, that portion of the settlement is not taxable.  However, if the property settlement exceeds your basis in the property, the excess is taxable income.

Punitive Damages
Punitive damages are fully taxable, even in personal injury cases.

It is very important when your attorney is negotiating a settlement that he/she classifies the settlement in a way that minimizes your tax burden.  The IRS will generally respect the classification of the settlement as long as it is consistent with the type of injury suffered.

If you have any questions about the taxability of a legal settlement, or if you would like a referral to a great personal injury attorney, please do not hesitate to send me an e-mail.

As always, I appreciate you leaving your feedback in the comment section below.

Adoption Tax Credit

Are you considering adopting a child?

Adopting a child can be truly rewarding, but the process can be expensive.  However, the cost can be partially offset through the Adoption Tax Credit.

For 2015, families can claim an adoption tax credit worth up to $13,400.  You may qualify for the adoption credit if you adopted a child and paid qualified expenses relating to adoption.  While this tax credit is non-refundable, any unused portion may be carried forward for up to 5 years.

Qualified adoption expenses are reasonable and necessary adoption fees.  They include:

• Court costs;
• Attorney fees;
• Travel expenses; and
• Other expenses directly related to the legal adoption of an eligible child.

An eligible child is a child under the age of 18 (who is not the child of your spouse or from a surrogate parenting arrangement), or an individual of any age who is physically or mentally incapable of caring for him or herself.

If you are adopting a U.S. child with special needs, you may qualify for the full $13,400 regardless of your actual qualified adoption expenses once the adoption becomes final.

For adopting children without special needs, when you are eligible to claim the adoption tax credit depends both upon whether the child is a U.S. citizen or resident and when the qualified expense is paid.

1. If you are adopting a child who is a U.S. citizen or resident:
• Any qualifying expenses paid before the year the adoption becomes final can be claimed the year after the year of the payment;
• Any qualifying expenses the year the adoption becomes final can be claimed that year; and
• Any qualifying expenses paid after the year the adoption becomes final can be claimed in the year of payment.
2.  If you are adoption a foreign child:
• Any qualifying expenses paid before the year the adoption becomes final cannot be claimed until the year the adoption becomes final;
• Any qualifying expenses paid the year the adoption becomes final can be claimed that year; and
• Any qualifying expenses paid after the year the adoption becomes final can be claimed in the year of payment.

Basically, if you are adopting a child who is a U.S. citizen or resident you can use the qualifying expenses to claim the adoption tax credit even if the adoption does not become final, but if you are adopting a foreign child the adoption must become final.

Additionally, if your employer has a qualified adoption assistance program, any amounts paid to you or on your behalf for the purposes of adopting a child may be excluded from your income.

The adoption tax credit does phase out based upon income.  In 2015, if your modified adjusted gross income is greater than $201,010 it begins to phase out and will be completely phased out when your modified adjusted gross income reaches $241,010.

If you are thinking about adopting a child and would like to learn more about the adoption tax credit, please do not hesitate to send me an e-mail.

As always, I appreciate your feedback in the comments section below.