Tax Consequences for Mental Anguish in Personal Injury Litigation

Paying taxes often results in mental anguish, but when mental anguish is the reason for additional taxes, that is just too ironical for words.

The awards given in a personal injury lawsuit are in several categories. All personal injury cases sue for economic damages such as actual expenses for medical care, property damage, loss of income, or anything else that are measurable in financial terms. Some states limit personal injury awards to these damages, while others allow non-economic awards also known as punitive damages, typically imposed on the defendant as punishment for the wrongful act. These include pain and suffering, and mental anguish, although some impose a cap on the amounts. These are psychological components that usually accompany physical trauma, although even without physical trauma there can be mental anguish i.e. defamation.

When claiming for mental anguish, it is important to note that there is a tax consequence for mental anguish that is independent of or separate from physical injury. For example, if false statements affected an individual’s reputation that affected personal relationships on top of a decline in professional standing that had a financial consequence, the mental anguish from the loss of friendship or affection may be considered compensable. However, such compensation would be taxable under federal law.

However, if the mental anguish is tied in with a physical injury such as the loss of a limb, then it would not be taxable. Awards for physical injuries are generally tax-exempt, while mental injuries are not unless it is proven to be inextricable linked or inseparable to the physical harm sustained. When seeking to claim punitive damages for mental anguish or other mental injuries, it is important to insist to the lawyer that this be tied in with a physical injury if it is at all possible. An experienced personal injury lawyer would know how this can be done.

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