Here’s what you should know about the impacts of income from a personal injury case on other financial aspects of your life.
You’ve just settled your personal injury case and now you need to know, “Does personal injury compensation affect benefits?” You’re wondering, “Do I need to pay taxes on my settlement?” and “How much will I have to pay on the settlement money?” These are great questions, but the answers are not black and white. Here’s an overview of what you should know regarding how personal injury settlements can impact other income.
Does personal injury compensation affect benefits?
Yes, a personal injury settlement can sometimes adversely affect eligibility for government benefits. Here are some answers to frequently asked questions:
Will a personal injury settlement affect Social Security?
If you receive social security based on age, a personal injury settlement will have no effect on your social security benefits.
Does a personal injury settlement affect Social Security Disability?
If you receive social security based on a disability, a personal injury settlement will not affect these benefits.
Will a personal injury settlement affect Medicare?
A personal injury settlement has no effect on receipt of Medicare, with one note. If the personal injury settlement includes future medical expenses, a Medicare Set Aside may be required. This is used to pay for future medical expenses. In this case, an amount is set apart from the overall settlement and used to cover those medical expenses when they occur.
Will a personal injury settlement affect Medicaid?
A substantial personal injury settlement can affect eligibility for means-tested government benefits such as Medicaid. In the event that you remain eligible for Medicaid after your personal injury settlement, your Medicaid benefits may be reduced.
Will a personal injury settlement affect Supplemental Security Income (“SSI”)?
A substantial personal injury settlement can impact your eligibility for Supplemental Security Income (SSI). Depending on the amount of your settlement, your benefits may be reduced or lost entirely.
Will a personal injury settlement affect BadgerCare?
Depending on the size of your personal injury settlement, your eligibility for BadgerCare could change. You may no longer be eligible for BadgerCare or could see a reduction in benefits.
Benefits like Medicaid, SSI, and BadgerCare are designed for those with limited income and resources. A significant settlement could disqualify one from receiving these benefits. Many government benefit programs have maximum income limits, asset limits, and both income and asset limits. A deeper look is required to determine disqualification.
You can keep your benefits even when you receive a substantial personal injury settlement with one of the following approved methods:
- These funds hold the settlement funds in a trust for the benefit of the person injured. They don’t affect the receipt benefits. There are restrictions on use of the funds. Generally, when the injured person dies, any funds in the trust are used to reimburse the State for benefits it paid.
A structured settlement or annuity: Payments can be spread out over a longer time, so the injured person remains under the income limits required to maintain benefits.
- This involves spending the settlement funds for property or services that don’t affect eligibility. Good examples include paying off debt, buying a home, or making home improvements.
- ABLE accounts are specialized savings accounts that are not normally counted toward an asset limit. Wisconsin law does not currently allow the creation of ABLE accounts, but other states do allow out-of-state individuals to start these accounts in their states. Hopefully, Wisconsin will soon get on board with other states in allowing creation of these accounts.
Does a personal injury settlement affect Section 8?
Section 8 housing vouchers are awarded based on income. While your injury settlement may not disqualify you from this type of housing, interest earned on the settlement may push you over income limits. Those income limits change over time and are not the same for all locations. It is important to work with an expert to determine if interest earned on the settlement will push you over the limit.
Will a personal injury settlement affect child support?
Getting a settlement can affect the amount of child support and alimony—or spousal maintenance—you owe and the amount you get to take home. This is particularly true if your settlement is big or if you’re behind on your payments.
Are settlement funds taxable?
Generally, personal injury settlements are not subject to federal or state income taxes. But there are exceptions. These include punitive damages and some emotional or mental injuries. Interest on settlements and confidential settlements are also taxable.
Tax on Punitive Damages: Punitive damages are taxable. Settlements do not normally divide different types of damages, such as pain and suffering, medical expenses, or punitive damages. If the settlement does involve punitive damage, an allocation of the various categories of damages can be made as a part of the settlement to make a smaller amount taxable.
Tax on Emotional Injuries: Damages for purely emotional or mental injuries are taxable when they are not the result of a physical injury. In personal injury cases where there is a physical injury, emotional or mental damages are not taxable.
Tax on Settlement Payment Interest: Interest on your personal injury settlement is taxable. In certain first-party claims, like uninsured motorist or underinsured motorist, interest may be a concern. If a jury verdict was obtained, interest begins on the amount collected from the day of the verdict forward. That interest is taxable.
Tax on Confidential Settlements: In some cases, parties may want to keep information secret. When your settlement is confidential, a portion of the settlement payment may be taxable. Murphy & Prachthauser generally advises clients to keep the settlement amounts confidential because scammers tend to appear when the public learns someone is getting a large amount of money.
If you receive a settlement that is partially or wholly taxable, it’s important to report the taxable part on your tax return. We recommend working with a tax professional to ensure you’re meeting your obligations and taking advantage of any exemptions that apply to you.
To be sure, ask the professionals
Understanding tax liability after a personal injury determination can be complicated. That’s why we recommend guidance from knowledgeable legal and financial professionals like Murphy & Prachthauser to guide you in structuring your settlement to safeguard your benefits.
Internal Revenue Service (IRS): Is the Income I Receive Taxable?
IRS Publication 4345: Settlements — Taxability
Disclaimer: Laws and regulations change, and the information in this article may not be up-to-date at the time of reading. Always consult a tax professional or legal advisor for the most current information and personalized advice. This blog post is for informational purposes only and should not be considered legal or tax advice. For advice on your specific situation, consult a qualified attorney or tax professional.