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How Personal Injury Settlements Are Taxed in Colorado

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August 18, 2023 Personal Injury

If you or somebody you love has sustained an injury caused by the actions of another individual, business, or entity, you should be able to recover compensation for your losses.

Most personal injury claims in Colorado are resolved through settlements with insurance carriers; however, when an insurance company or liable party does not offer a fair and full settlement, these cases go to trial.

If your personal injury case is successful, and you are awarded compensation, you need to know if your monetary compensation will be taxed.

Below we cover some frequently asked questions about injury settlement taxation. Note that this is not legal advice and you should consult with your tax advisor to learn more.

Do You Pay Taxes on Your Personal Injury Settlement in Colorado?

The proceeds from a personal injury settlement or jury verdict award will not be subject to state or federal tax. The general exclusion from taxation applies to the damages an individual receives from the expenses incurred due to bodily injuries or physical illness.

These damages are not taxed because any restitution for injuries or illness caused by a tortfeasor is intended to make the victim whole.

This compensation is meant to pay a person back for the damages they had to endure as a result of the incident and is not any type of income that a person would otherwise have received. Therefore, your compensation from a personal injury lawsuit will not be subject to taxation.

Generally, the types of personal injury damages that may not be taxed after an injury occurs in Colorado include the following:

  • Compensation for medical bills arising due to the injury or illness
  • Property damage expenses
  • General household out-of-pocket expenses
  • Pain and suffering damages

What Parts of My Personal Injury Settlement May Be Taxable?

Do I have to report personal injury-settlement to IRS

There may be instances where a portion of the personal injury settlement or jury verdict can be taxed.

As mentioned above, the compensation meant to pay a person damages for their injuries or illness will not be subject to taxation, but other forms of compensation through an injury settlement will be subject to taxes.

Punitive damages are not awarded in every type of personal injury case. These damages, also called exemplary damages, are designed to punish the defendant and deter others from engaging in similar conduct.

If you are awarded punitive damages through your personal injury verdict, these will be taxed at the state and federal levels.

There are other situations where you may find that your settlement is taxed.

For example, if you deducted the cost of medical expenses arising due to the injury from your taxes on a previous year, you will be obligated to include the portion you receive from your personal injury settlement as taxable income.

This is not uncommon because personal injury cases can take years to conclude, so individuals may end up taking a deduction on their medical expenses while the case is ongoing.

If any post-judgment interest accrues on your outstanding jury award amount, this may also be subject to taxation.

It is not uncommon for this to happen if a jury awards a plaintiff a sum of money. If the defendant decides to appeal this during the appeals process, the interest on the original judgment will be taxed.

Consult With Your Tax Advisor

When it comes to personal injury settlement taxes, your tax advisor will be able to answer any questions you have and help you navigate the process. Consult with your tax advisor to learn more about how personal injury settlements are taxed in Colorado.

Contact an Attorney for Help With Your Injury Case

If you or somebody you care about has sustained an injury caused by the actions of another individual or entity in Colorado, we recommend that you reach out to an attorney as soon as possible.

A skilled Denver personal injury attorney can examine the facts of your case, gather evidence to determine liability, and help you obtain maximum compensation for your losses.