Are Personal Injury Lawsuit Settlements Taxable?

Posted on July 20, 2017 in Personal Injury Lawyers

Going through a season of injury and recovery can be one of the hardest times of your life. If you’re dealing with the situation right now, or if you recently received compensation with the help of an experienced personal injury lawyer, you may be wondering about the tax implications of a settlement. Read on to find out what you can expect!

The Basics

Generally, your personal injury settlement cannot be taxed. But there are several exceptions and exclusions that could cause part of your settlement to be taxable by the IRS, so let’s take a look at what those might be.

Money you receive in a personal injury settlement isn’t regular income, so it makes sense that the taxes wouldn’t work the same way as they do on your paycheck. It’s considered “compensatory,” which is money that’s meant to compensate an individual for a loss. And when it comes to taxes, this is not exactly a black-and-white situation.

Non-Taxable Compensation

According to the IRS, you cannot be taxed on compensation from a personal injury settlement or a jury award that is intended to compensate you for the following:

  •      Physical injuries
  •      Emotional distress as a result of physical injuries

Anything you receive for economic damages (think medical bills) and noneconomic damages (pain and suffering) is typically going to be non-taxable.

Great news, right? Yes! But there’s a little more to the story than that.

Compensation that May Be Taxable

Depending on how your compensation was used and the decisions you made filing taxes in the past, you may still owe something to the IRS. The following situations may result in you paying taxes on your settlement:

  •      Past tax benefits related to your case (i.e. if you deducted medical expenses related to your accident on a previous income tax return, you’ll need to pay the IRS back now that you’ve been compensated)
  •      Interest on money received from a personal injury case (this should be listed as “interest income” on your 1040)

There’s another thing to consider, as well: punitive damages. This type of compensation, which is meant to bestow additional punishment on the defendant for their negligent behavior, may be taxed in a variety of situations — including those related to physical injuries. If you fail to include punitive damages on your tax form, you could be making a huge mistake. Make sure to include it on your 1040 as “other income.”

Wettermark Keith Is Here to Help

Our experienced personal injury lawyers here at Wettermark Keith can help you understand the tax implications of settlements. Don’t let the unknown cause a headache for you simply because you didn’t have all the information you needed. Plan ahead for tax season now. Contact us today for more advice!