Tax season is upon us! If you’ve settled a personal injury claim or lawsuit in the past year, you’re probably wondering whether Uncle Sam expects you to pay taxes on that money.
Here’s the short answer: In most cases, no.
Don’t stop reading yet, though. There are many factors that determine whether a settlement amount is taxable. We’ll walk you through the basics of settlement taxes, but it’s important to know that only a tax expert can answer specific questions for you. If your settlement was complex or included punitive damages, it’s best to consult a CPA or personally contact a lawyer.
Whether your settlement came from out-of-court negotiations or the verdict of a lawsuit, it’s all the same when it comes to taxes.
Generally, personal injury settlements are not taxable. Federal tax law specifically states that compensation for personal physical injuries or sickness will not be included in your gross income – the income you pay taxes on.
Typical personal injury settlements include compensation for things like medical bills, lost wages, pain and suffering, emotional distress, and loss of consortium. As long as you have a physical injury (and, let’s face it, it’s unlikely you’ll be getting a settlement for those things unless you were physically injured), you don’t have to pay taxes on that money.
Bottom Line: If you received a typical injury settlement for physical injuries, you don’t have to pay taxes on that amount.
Sometimes your settlement will include “non-economic damages” or compensation for “emotional injuries” – that would include emotional suffering or distress, PTSD, inability to enjoy your life normally, etc. Federal tax law states that as long as those injuries were linked to a physical injury, any compensation you receive for them is not subject to tax.
If, for example, you made a claim based on employment discrimination at work, or emotional distress from a car accident, but didn’t have the slightest physical injury, then your settlement or verdict would be taxable.
Bottom Line: Did your emotional distress stem from a physical injury? Then that compensation is tax-free, too.
Punitive Damages and other Exceptions
If you receive money for punitive damages, however, that money is always taxable. Punitive damages are awarded only when a defendant has acted “willfully or recklessly;” in other words, if the defendant intentionally caused damage to the plaintiff. This is separate from “compensatory damages” mentioned above that are meant to compensate you for injuries or lost wages. In personal injury cases involving car wrecks, it’s difficult to prove that a defendant acted willfully, so punitive damages are very rarely awarded in those cases.
If a court did award punitive damages, your lawyer would request that those be calculated separately from compensatory damages. You would then be responsible for paying taxes only on the money received for punitive damages.
Bottom Line: You probably didn’t receive punitive damages for your personal injury settlement, but you can consult your injury lawyer if you’re not sure.
Still not convinced? Take a look at this article on Settlements Taxability from the IRS for even more information; for a tax document, it’s surprisingly easy to read and understand!
If you are a former or current client at Taylor King Law and have questions about filing your taxes after receiving an injury settlement, please call our office at 1-800-CAR-WRECK (227-9732). Your lawyer will be happy to speak with you and answer any questions you may have.
Have you been injured in a car or motorcycle wreck in Arkansas? You may have legal rights to compensation. An experienced personal injury lawyer will stand up to the insurance companies and ensure that you get the settlement you deserve. Call Taylor King today to begin your FREE consultation or submit a contact form here on our website.