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Is Your Personal Injury Settlement Taxable?

Personal Injury Lawyer

There are many misconceptions regarding the taxation of compensation received from personal injury settlements on the internet. A vast majority of personal injury cases settle before or during trial, and once you accept the settlement offer and sign a release, the case is resolved. You should receive your compensation swiftly and get back to living your everyday life, however, you must be informed of a few tax rules as they apply to personal injury settlements and could potentially affect your compensation.

The proceeds received from most personal injury claims are not taxable, either under state or federal law. Regardless of whether the case was settled before or after filing a personal injury lawsuit in court or if the case went to trial and won, neither the IRS nor the state can tax you on the settlement or verdict proceeds in most personal injury claims. Federal tax law excludes damages received as a result of personal physical injuries or sickness from a taxpayer’s gross income, such as lost wages, medical bills, emotional distress, pain and suffering, and loss of consortium. All these items are not taxable so long as they come from a personal injury or physical sickness. 

For example, if you were negligently exposed to a bacterium or virus which made you extremely sick, any compensatory damages you receive as a result of your illness will not be taxed. 

Exceptions To the Rule

Punitive damages are additional damages that the defendant must pay on top of all other fees and are awarded by a court of law not only to compensate injured plaintiffs but to punish defendants whose conduct is considered grossly negligent or intentional. Punitive damage’s purpose is to deter the defendant and others from committing similar negligent actions in the future. Factors which could be taken into consideration before applying punitive damages to a personal injury case may be if the defendant’s actions were malicious, intentional, or grossly negligent, and looking to similar cases to see if punitive damages were awarded to determine if precedent could be applied to this case. Additionally, these damages could vary depending on state and jurisdiction, thus, an injury lawyer can inform you of the laws within your jurisdiction. Punitive damages are the only fees within a personal injury case which can be taxed. These damages and fees are not to be confused with compensatory damages, whose purpose is to compensate the victim of any harm or wrongdoing. While roughly only 5% of verdicts are awarded punitive damages, it is still wise to be informed of these kinds of damages and fees within a personal injury case. 

Another potential exception to the rule includes emotional injury, as if you file a claim for emotional distress or employment discrimination, your settlement could be taxable unless you as the plaintiff can prove you were physically harmed. 

If you’ve been injured due to the negligence of another, a personal injury attorney can advise you on the complexities of the law, inform you of your rights, and help you obtain the compensation you deserve. 

Thanks to a personal injury lawyer from our friends at Eglet Adams for their insight on personal injury settlements and if they are taxable.