Posted on Friday, December 1st, 2023 at 9:00 am
Do you anticipate receiving a personal injury settlement or award in the near future? Do you live in or near Chicago, Illinois?
If so, you may have questions about tax on lawsuit settlements in Illinois. Understanding whether your settlement or award may be subject to taxes can help you plan financially.
No one can guarantee you will receive a specific sum of money when you file a personal injury claim. You should never base your financial plans on the assumption that you’ll collect an exact amount in a settlement.
Learning about the impact of taxes on lawsuit settlements is wise. Taking this step ensures you’re prepared to set aside the necessary funds if and when you do receive a settlement.
Types of Compensation and Damages Available in Illinois
Your settlement or award may include compensation for two types of losses:
- Economic losses
- Non-economic losses
An economic loss has a clear dollar value. For example, perhaps you sustained a spinal cord injury as a result of a motor vehicle accident. Your economic losses in these circumstances may include medical bills. If your injury causes you to miss work during your recovery, your economic losses might also consist of lost wages.
Economic losses may even include future losses. In this scenario, your compensation might include money for ongoing medical care if necessary.
Non-economic losses are less tangible. Emotional distress is a common example of a non-economic loss.
These are subjective losses that don’t have specific prices attached but that still have value.
If your case goes to trial, a jury might also award punitive damages. Under Illinois law, juries can award punitive damages when a defendant acted with “evil motive.” Or they may award punitive damages when a defendant showed “reckless and outrageous indifference” to the harm they might cause.
What You Need to Know About Taxes on Lawsuit Settlements in Chicago, Illinois
According to the Illinois Department of Revenue (IDOR), Illinois taxes personal injury settlements the same way the federal government does. Thus, if a settlement is subject to taxation under the federal government, it’s subject to taxation in Illinois.
Important points from the Internal Revenue Code regarding tax on lawsuit settlements in personal injury cases are:
- Gross income doesn’t include compensation for personal injuries. Any compensation you receive for personal injuries isn’t subject to taxation.
- The rules regarding tax on lawsuit settlements in personal injury cases apply to both lump sum payments and periodic payments. Regardless of how you receive your settlement funds, you don’t have to report them as taxable income.
- Workers’ compensation settlements are also not subject to taxation at the federal level. That means Illinois places no tax on a workers’ compensation settlement.
- You do have to report punitive damages as gross income. This is because punitive damages don’t compensate you for actual losses.
The above points may answer your general questions about paying taxes on personal injury settlements. However, your attorney could provide additional details, and if you’re engaged in financial planning, speaking with a financial advisor will be helpful.
Financial Planning and Your Personal Injury Settlement: Important Information
In addition to learning about tax ramifications, financial tips to keep in mind when expecting a lawsuit settlement include:
- Discuss payment options with doctors – Remember, the money you receive serves to compensate you for losses like medical bills. Plan to use it accordingly. Your attorney may talk with your doctors to find out if they will wait until you’ve received a settlement to bill you.
- Know the difference between a lump sum and structured settlement – Depending on the circumstances, you may receive a lump sum or periodic payments. Talk with your attorney about which payment type is better for you and consider the financial implications of both when determining how you’ll use or save settlement funds.
Most importantly, don’t make any purchases based on the assumption you’ll receive a settlement. Until you have the money in your hand, don’t count on receiving a specific amount.
Contact a Chicago, IL, Personal Injury Attorney
There are several steps you may take to improve your chances of receiving the settlement you deserve. Hiring a qualified Chicago personal injury lawyer to represent you is one such step.
At Wallace Miller, our lawyers are prepared to offer the dedicated representation you need now. Learn more about how we can help by contacting us online today or calling us at (312) 261-6193 for a free case review.
Related Posts
Evidence You Need To Win Your Personal Injury Claim
How Pain And Suffering Damages Are Calculated
Speaking With Doctors After An Accident