Are Personal Injury Settlements Taxable in South Carolina?

Personal injury settlements in South Carolina are typically not taxable, with a few exceptions. The reason for your settlement or award determines whether or not you will need to report your compensation for tax purposes.

If your compensation is related to your physical injuries, you usually do not need to pay taxes on it. However, if you receive compensation in the form of punitive damages or for psychological damages, you will likely need to pay tax.

If you’ve been injured in an accident through no fault of your own, get experienced personal injury lawyers in Columbia on your side. They can help you pursue a full settlement for your losses.

Compensation Related to Physical Injuries

Your attorney will calculate your damages to better understand what kind of award or settlement they should work toward. One of the biggest factors that determines the amount of your compensation is the seriousness of your injuries.

Your injuries lead to expenses such as:

• The cost of emergency care and ambulance services
• Medical expenses such as doctor visits, specialist consultations, procedures, and surgeries.
• Future medical costs you are expected to incur, like ongoing treatments, physical therapy, and prescription medications.
• Lost wages when you can’t work because of your injury.
• Pain and suffering resulting from your injury

Per the Internal Revenue Service’s page on the tax implications of settlements and judgments, compensation for these damages related to your injury is not taxable. Likewise, settlements for property damages that do not exceed the value of the replaced property are not taxable.

Compensation for Emotional Distress

Non-economic damages are not easily attached to a specific dollar amount and, therefore, are more subjective than economic damages. Compensation for damages such as emotional distress and mental anguish is exempt from taxes only when they arise as a result of your injuries.

For example, suppose that you receive compensation for PTSD as a result of harassment or defamation as part of your personal injury settlement. In such cases, that portion may be taxed under South Carolina and federal laws.

Awards for Punitive Damages

Punitive damages in South Carolina personal injury cases are awarded to punish a defendant for willful, reckless, or malicious conduct and to deter similar behavior in the future. They are not meant to compensate the victim but to penalize extreme wrongdoing.

South Carolina law generally caps punitive damages at three times the compensatory damages or $500,000, whichever is greater. This can add a large sum to your final award in a personal injury case, and unlike other damages, it is taxable in South Carolina.

Interest on Your Compensation

Whether you receive interest depends on how your settlement gets paid. If your agreement contains provisions that could lead to the accumulation of interest, that interest is taxable under federal and South Carolina law.

Your settlement may specify that the agreed-upon sum will accrue interest at a fixed rate or a variable rate tied to a benchmark. It may detail how interest is calculated and define when interest begins to accrue.

The principal settlement amount related to physical injuries generally remains non-taxable, but any interest generated under the agreement’s own terms is taxed separately as ordinary income.

How to Pay Taxes on Your Personal Injury Settlement

It’s smart to talk to your accountant for tax preparation on how your settlement will impact your specific tax situation. You can also refer to the IRS or the South Carolina Department of Revenue for the most relevant information.

Every situation is unique, but here are a few generalities to keep in mind, including:

• Taxes on a settlement are not automatically deducted. When settlements get paid, you usually receive the full settlement amount
• It’s your responsibility to report and pay any taxable portions when you file your income tax return for that year.
• You pay the taxes at the end of the tax year when filing your IRS and South Carolina tax returns.
• If you expect a large tax liability from taxable portions such as interest or punitive damages, you can make estimated quarterly tax payments during the year to avoid penalties.

Get Help With Your Personal Injury Case

Personal injury settlements in South Carolina are not taxable when the compensation comes from physical injuries. This includes things like doctors’ bills, procedures, emergency care, and medication. It can even include lost wages if they are related to your injury.

However, if parts of your award come from other sources, such as punitive damages, you can expect to owe taxes. To learn more about a settlement and to begin pursuing compensation, turn to John Foy & Associates, where we’re known as The Strong Arm™. Our team has recovered more than $1 billion for our clients.

If you need help with a personal injury case, reach out now. Our attorneys have more than 350 years of combined experience helping injured accident victims get the compensation they deserve. Call today for your free consultation.