Taxes on Lawsuit Settlements and Awards in Illinois

If you’ve sustained injuries in Illinois due to the negligence of another party, you may be entitled to compensation for your injuries and losses. Now is a good time to learn whether you will pay taxes on that compensation.

Whether there is a tax on lawsuit settlements in Illinois can depend on several factors. Often, lawsuit settlements are not taxed. However, there are exceptions. The types of compensation you receive can influence whether you pay taxes on a lawsuit settlement or award.

When Compensation Is Not Taxed

Lawsuit settlements and awards compensate accident victims for the losses they incurred because of someone else’s negligence or wrongdoing. These losses may be economic or non-economic in nature. Examples of economic losses with specific dollar values attached include:

  • Medical bills
  • The cost of at-home care/health services
  • The cost of ongoing care
  • Lost wages
  • Property repair or replacement

Non-economic losses don’t have strict dollar values. A common non-economic loss is the pain and suffering someone endures in the aftermath of an accident. Other losses of this type include loss of enjoyment of life, post-traumatic stress disorder, and disfigurement.

The money you get from a personal injury claim or lawsuit may come through a settlement or an award ordered by the court. This type of compensation is not taxable under federal or Illinois law. The reason is simple: It’s meant to compensate you for losses you sustained due to someone else’s negligence or wrongdoing. Your compensation wouldn’t serve the intended purpose of “making you whole” if you had to pay taxes on it.

Interest on Personal Injury Awards

Under Illinois law, when courts award damages in personal injury cases, interest may accrue. It will be calculated from the date the judgment is made until the judgment is entered. Interest accrues only on the unpaid portion of the award.

Interest doesn’t compensate a victim for any loss, and it’s subject to taxation.

When You May Need to Pay Taxes After a Lawsuit in Illinois

According to the United States District Court for the Northern District of Illinois, more than 95 percent of civil suits result in settlements before going to trial. However, you may need to file a lawsuit if the at-fault party’s insurance company doesn’t offer the compensation you deserve. A jury or judge will decide your case in court if you take this step.

The court may allow an award of punitive damages if they believe the defendant harmed you intentionally, wantonly, or fraudulently. Punitive damages serve to punish the defendant and discourage them from engaging in similar bad behavior in the future.

The plaintiff will receive any punitive damages the court awards. However, punitive damages are not compensation for an accident victim’s specific losses. As a result, they are subject to taxation.

What About Workers’ Compensation Settlement?

A workers’ compensation settlement is another type of settlement in which you may receive compensation for injuries. Workers’ compensation cases are different from personal injury cases in several ways. For example, you don’t need to prove negligence when seeking workers’ compensation benefits. You only need to provide evidence that your injuries arose out of and in the course of your work for your employer.

You might wonder if workers’ compensation settlements are different from other settlements with regard to whether they’re taxed. Luckily, they are not. According to the Illinois Workers’ Compensation Commission, workers’ comp benefits aren’t taxable under federal or state law.

The Importance of Professional Advice

A blog entry should not be mistaken for professional tax advice. The information here is general and doesn’t account for the specifics of your case. To thoroughly understand the tax implications of a lawsuit settlement, speak with your personal injury attorney. They’ll know all about whether any portions of your settlement are taxable and which ones are not. You can also check with your CPA.

Preparing for a Personal Injury Settlement: Other Important Financial Tips

Taxes on Lawsuit Settlements and Awards in Illinois

Understanding how taxes on personal injury settlements work is important when you’re getting ready to receive a settlement or an award of damages. Other tips to help you financially prepare include:

  • Asking your doctors and other care providers if they would be willing to wait until you receive your compensation to bill you
  • Learning how the settlement will be disbursed (for example, your lawyer will receive a percentage)
  • Making plans for how you will use the settlement money to cover your losses
  • Speaking with a financial advisor to consider how you might invest your settlement
  • If applicable, consider whether you will receive a lump sum payment or a structured settlement

Be aware that it’s unethical for an attorney to promise a client they will receive a specific dollar amount in a settlement or award. No one can tell you exactly how much money you will receive when you resolve your case. A lawyer can estimate a potential settlement, but they can’t make guarantees.

Don’t make financial plans based on the assumption that you will receive a certain amount of money. Plan how to use the money if you do receive it, but don’t make plans that depend on receiving a specific amount of money.

It’s also important to thoroughly review and understand the terms of your settlement. They may prohibit you from sharing certain information about the outcome of your case. These restrictions might even limit the degree to which you can discuss how much you settled for.

Contact an Illinois Personal Injury Attorney

Seeking professional assistance by talking to a CPA when you receive a settlement is wise. Similarly, it’s smart to review your case with a lawyer when filing a personal injury claim or lawsuit.

Our Illinois personal injury attorneys at JJ Legal have the experience necessary to provide the representation you deserve. If you have a strong case, we can help you pursue the full amount of compensation for which you may be eligible. Get started today by contacting us online or calling us at 312-200-2000 for a free case review.

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