Settlement Strategies for Non-Physical Personal Injuries

Recoveries for non-physical injuries are fully taxable. That's not news; it's been the law since 1996. However, by simply agreeing to a traditional lump sum settlement, you can inadvertently make a bad situation much, much worse.

The problem is this: electing to receive all the funds in a single tax year can propel you into an artificially high tax bracket, thus costing you more in taxes than is otherwise necessary. Every dollar you pay in excess taxes obviously means less "spendable" money for you.

The solution is to spread the payments out over a period of years to hopefully bring them in at more realistic (lower) tax rates. Deferring payments in this fashion can produce overall increases in net payout of 20%, 30%, even 40% depending on plan and individual circumstance*.

Consider this simplified example: a worker presently earning $30,000 a year in ordinary income settles her wrongful termination lawsuit for $250,000. If she takes that whole settlement in cash, for tax purposes she now looks like a $280,000 wage earner, not the $30,000 wage earner she really is. Under this scenario, her nominal federal tax rates would more than double from 15% to 33%. State taxes would make the taxes higher still.

She is otherwise healthy and doesn't actually need that money all at once. By simply having her settlement paid out over time, she lessens this problem. And while she's at it, she can time the settlement payments to meet specific financial needs such as mortage payments, tuition payments, or even supplemental retirement income.

*Please note that tax law is highly complex and every taxpayer's situation is different. You should seek advice from qualified tax attorney or accountant before making final decisions. JMW Settlements is not a law firm, and does not offer an opinion on the ultimate taxability of any particular person's recovery.