Do You Have to Pay Taxes on a Personal Injury Settlement?
Receiving a personal injury settlement can provide important financial relief after a serious accident. But before deciding how to use the money, you may wonder whether the IRS will take a portion of your settlement. Are personal injury settlements taxable?
In many cases, compensation received for physical injuries or physical sickness is not subject to federal income tax. However, the tax treatment of a personal injury settlement can depend on what the settlement is intended to compensate you for.
Personal Injury Compensation Is Often Tax-Free
Under federal tax law, damages received because of personal physical injuries or physical sickness are generally excluded from taxable income. This commonly includes compensation arising from car accidents, motorcycle accidents, pedestrian accidents, and other incidents involving physical injuries.
For example, if you are injured in a car accident and receive a settlement compensating you for medical expenses, physical pain, and other losses resulting from your injuries, much of that settlement may be tax-free.
There are exceptions, however, which is why the way a settlement is structured can matter.
Are Medical Expenses Taxable?
Compensation for medical bills related to a physical injury is generally not taxable. This may include reimbursement for emergency treatment, hospitalization, surgery, rehabilitation, and other accident-related medical care.
An exception may apply if you previously deducted those medical expenses on your tax return and received a tax benefit from the deduction. In that situation, some of the settlement reimbursement may need to be included in your income.
Is Compensation for Pain and Suffering Taxable?
Compensation for pain and suffering is generally not taxable when the damages result from a physical injury or physical sickness.
The rules can be different when emotional distress or mental anguish is not connected to a physical injury. Compensation for emotional distress alone may be taxable, although amounts attributable to certain medical expenses may receive different treatment.
What Parts of a Personal Injury Settlement May Be Taxable?
Even when the underlying case involves a physical injury, certain portions of a settlement may be taxable.
Punitive damages are generally taxable. Unlike compensatory damages, punitive damages are designed to punish wrongful conduct rather than compensate an injured person for their losses.
Interest paid on a settlement or judgment is also generally taxable. In addition, compensation for certain claims that do not arise from a physical injury or sickness may be treated as taxable income.
Because a settlement can include several categories of damages, the settlement agreement’s allocation of the payment may have important tax consequences.
Talk to a Personal Injury Attorney About Your Settlement
Taxes may not be the first thing you think about after an accident, but understanding the potential tax consequences of a settlement can help you avoid surprises later.
A personal injury attorney can help you understand the different components of a proposed settlement and how they relate to your injury claim. For specific advice about federal or state tax consequences, it may also be appropriate to consult a qualified tax professional.
If you were injured because of someone else’s negligence, contact our personal injury attorneys to learn more about your legal options and the compensation that may be available to you.
Contact Justice Through Compensation for Help
If you or a loved one was injured in an accident, please know that the law firm of Justice Through Compensation is here to help. Our legal team is skilled, experienced, and passionate in their representation. Let us shoulder the burden of an injury claim or lawsuit while you focus on healing from your injuries. Contact us today for the quality legal help you deserve.
* Main image at top by Magnific