Just when your injury was becoming a distant yet painful memory and you were beginning to wonder if you could ever put your case behind you, your personal injury attorney successfully settled the claim — so now what?

Before you get to pick up your check, three entities have requirements that will need to be met, including:

The Liability Insurance Company

Typically one of the first things you will have to do after your case settles is to sign a release from the liability insurance carrier to officially settle your claim. This release will likely contain language stating that you are forever giving up your right to bring a lawsuit against the person or company responsible for your injuries (from this specific instance). In exchange for your signature, the insurance company will release the agreed-upon sum of money jointly to you and your attorney.

Your Attorney

But before anyone else gets paid, your attorney will deduct his fees, out-of-pocket expenses, and other costs associated with your claim from the settlement check. Your lawyer’s contingency fee will be equal to the percentage you agreed to pay him upon settlement when you signed the retainer agreement — commonly one-third of the award.

Your Medical Providers

Before you get your check, your attorney will usually pay all your accident-related medical bills that are still outstanding as well as reimburse any insurance company that paid medical expenses on your behalf. If your settlement isn’t sufficient to cover all your medical bills or your providers assessed interest to your account, your attorney will likely attempt to negotiate a discount for you and get the interest charges waived.

What About the IRS?

If your settlement is intended to cover physical injuries or illnesses, then the award will not be taxable as income, provided you didn’t previously claim any medical expense deductions on your income tax related to that same injury or illness.

Assuming you didn’t claim such a deduction, you won’t need to claim any part of the settlement as income for federal income tax purposes. But if you did claim a deduction, you’ll most likely need to report the settlement as “Other Income” to the IRS.

There are a few situations when your settlement might be taxable, such as when your award was meant as an interest payment or was intended to compensate your for pain and suffering over and above your actual medical expenses. If your settlement includes punitive damages, they will most likely be taxable.

Image by Scott J. Waldren

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