If you’ve suffered a personal injury, seeking compensation is likely on your mind. While you might be entitled to certain damages, you might wonder if you’ll have to pay taxes on the settlement amount. The answer, as with most legal questions, is "it depends." Let’s review different types of damages you might receive and how Rhode Island taxes them.

Compensatory Damages

Compensatory damages cover expenses and losses related to your injury. For example, it may include medical bills, lost wages, and property damage. You might wonder if you’ll have to pay taxes on compensatory damages, since they are meant to reimburse you for expenses you’ve already paid or lost. The general answer is no – compensatory damages aren’t taxable.
However, there could be exceptions. For example, suppose you deducted medical expenses on your tax return relating to an injury. In that case, receiving compensation could be seen as reimbursement and could impact your taxes. Additionally, if you receive interest on your settlement amount, that interest is taxable.

Punitive Damages

Punitive damages are meant to punish the defendant for their behavior that led to the injury. Rhode Island state law allows the recipients of punitive damages to receive their full settlement without any state tax obligation. The IRS considers any damages exceeding compensatory damages to be taxable, however.

Lost Wages

A significant component of a personal injury settlement may be lost wages. Since lost wages are income you would have earned, they are taxable. Your attorney will provide you with a Form W-2 that details the lost wages and taxes withheld.

Interest on Settlement

If you receive interest on your settlement amount, then that interest will be subject to taxation. You’ll receive a 1099-INT that lists how much interest you received that tax year.

Structured Settlements

Sometimes, instead of a lump sum payment, Rhode Island courts may order a structured settlement. If the settlement arrangement follows federal law specifically structured to avoid taxes, then those amounts will not be subject to state or federal tax. This generally happens with personal injury cases involving minors.

Consultation with a Tax Professional

When it comes to taxes on a personal injury settlement in Rhode Island, your situation is unique. It’s essential to consult a tax professional on how your compensation will impact your taxes specifically. An experienced personal injury attorney may also be able to advise if you’re likely to be taxed on your settlement based on your damages.

Conclusion

Receiving a settlement for a personal injury can bring valuable financial stability. It’s crucial to pay attention to any tax implications. Generally, compensatory damages are not taxable in Rhode Island, but punitive damages, interest, and lost wages are. It’s essential to keep in mind that every situation is unique, so it’s wise to consult a tax professional to ensure compliance with all tax laws.