How Personal Injury Settlements Are Taxed
By Chris Dixon
You’ve filed a claim or a lawsuit and won. You may have gotten a check. But what happens next?
Federal and state governments usually can not tax your personal injury settlement. This isn’t always the case, however. This area of personal injury law varies based on the types of damages you’re claiming (and have won), the state you’re in, and if there are any punitive damages. The caveat is that your settlement can’t be taxed (according to the IRS) if the compensatory damages are based on physical injuries. The Dixon Injury Firm will discuss some of these issues in this section of the FAQ to give you a better idea of how settlements are taxed.
Will My Injury Settlement Be Taxed?
The short answer is “no,” the government can’t tax personal injury claims. If taxes come up after you’ve settled a claim or won a lawsuit, it’s very important to have a personal injury lawyer look over the proceedings and the compensation you received. You should already have a PI attorney, after all, if a claim escalates to a lawsuit.
Physical Injuries Can’t Be Taxed
If you settle a personal injury claim in or outside of court, federal law makes it clear that damages received as compensation for a physical injury aren’t taxable. This includes any reimbursement you received for financial hardships relating to your injury, including the following compensatory damages:
- Medical bills
- Emotional distress
- Pain and suffering
- Loss of enjoyment
- Loss of consortium
- Lost wages and earning potential
General Damages May Be Taxed
The key point is that special damages (like those listed above) are — as long as they are directly related to your physical injury — are not taxable. However, general damages like emotional distress from employee discrimination, for example, may be taxed. If you make a claim for loss of enjoyment because a spouse died in a car accident, your claim may be taxed since you haven’t suffered any physical injuries.
If your settlement includes emotional distress or loss of consortium, for instance, because of your physical injury, your compensation can’t be taxed.
What Can Be Taxed If I Win an Injury Settlement?
As mentioned, there are a lot of “what if” scenarios when it comes to taxing personal injury claims. Here are a few of the big ones:
- Interest may be added onto your settlement based on the amount of time it took for your case to settle. This interest can be taxed in most circumstances.
- If you deducted out-of-pocket expenses while receiving medical care (for transportation, prescriptions, etc.), you’re going to have to include that on your income tax return and pay back the IRS. This is called “double dipping.”
- It’s rare to claim punitive damages against a negligent party in a personal injury case. However, if a punitive fee is added onto your settlement, that can be taxed as well. Punitive damages are to punish the at-fault party and have nothing to do with your physical injuries. Punitive damages are considered taxable income.
Do You Need a Personal Injury Lawyer?
Claims are complicated. While you may be able to win a claim on your own, an injury attorney will be able to maximize the amount of compensation you receive while expediting the process. Hiring a lawyer doesn’t have to cost you a penny. Most injury lawyers charge a contingency fee, or a percentage, of any settlement. You don’t pay if you don’t win.
However, you do want to win the highest possible amount for your claim or lawsuit. An experienced lawyer can help you calculate current and future expenses related to your injury, protect you from being undercut by insurance companies, and make sure you get the reimbursement you deserve. A lot of accident victims find themselves in stressful financial and medical situations and sometimes accept low settlements. Contact a personal injury lawyer today at the Dixon Injury Firm for more information about our experience and practice areas. We offer free case reviews and consultations, and can help you figure out how to protect your settlement from being taxed.