Is a personal injury settlement taxable?
Personal injury settlements are not taxable, but there are a few exceptions. Personal injury settlements for damages other than physical injuries are taxable — this includes emotional injuries and punitive damage. Personal injury settlements that involve a breach of contract are also taxable. These rules apply to federal taxes and might be different in some states.
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UPDATED: Mar 8, 2024
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UPDATED: Mar 8, 2024
It’s all about you. We want to help you make the right life insurance coverage choices.
Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance company and cannot guarantee quotes from any single company.
Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different life insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
On This Page
- Personal injury settlements related to physical injuries are not taxable
- Emotional injuries or punitive damages are taxable if included in the settlement
- Personal injury cases that involve breach of contract are taxable in most cases
If you’ve suffered a personal injury that was the fault of another party, it can be an incredibly difficult time.
You may be dealing with an injury that is preventing you from working or even carrying out your simple day-to-day tasks. On top of that, you have the financial stress of not being able to work or having to pay for your treatment out of pocket.
Thankfully, this is where a personal injury attorney can help you. They can help get you a generous settlement to help offset your physical injuries and out of pocket expenses.
However, once your personal injury case is finished and you receive a cash settlement or favorable verdict, there can be more issues that need to be dealt with.
In this case, that’s whether or not your personal injury settlement or verdict is taxable, either by the federal government or state governments.
Is a personal injury settlement taxable?
For the most part, the answer is no. On the federal and state level, settlements or verdicts from a personal injury case are not taxable. This is true no matter the amount.
However, there are some special cases where either a portion of the settlement or the entire amount can be taxable. We’ll take a look at those below.
Compensation for Injuries Other Than Physical are Taxable
When talking about personal injury settlements or cases, we are most often talking about physical injuries that have been suffered. These can come from a car accident, a workplace accident, or almost any other type of situation where one party is at fault for causing injury to another.
Regardless of which type of accident you were in, there are professionals who can help. For example, you can hire a motorcycle accident lawyer who can help you get insurance compensation to help pay for your medical bills and damages.
But when it comes to taxes, only physical injuries are not taxable. Emotional injuries for example, are still fully taxable. So if your injuries were all emotional and there was no physical injury, you would need to pay taxes on the full amount of that settlement or verdict.
One thing to note though. Many times a settlement will have two components or more. So there may be physical injury and emotional injury. In this case, a competent lawyer will try to separate these two amounts to lessen the tax burden of having to pay on the full amount.
This may all sound complicated, but in general all physical related settlements are non-taxable. Any payout or portion of a payout related to non-physical injuries — pain and suffering, for example — are taxable.
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Are punitive damages in a personal injury case taxable?
Yes. Personal injury payouts that include punitive damages are taxable.
Punitive damages are those damages which are caused by conduct that is deemed especially egregious. So these payouts are above and beyond repayment for physical injuries, and are meant as a “punishment” for the other party. So therefore, punitive damages are always taxable since they aren’t directly related to the physical injuries.
Does it matter if the case was settled or needed to go to trial?
Many people mistakenly believe that if a personal injury case is settled, you will need to pay taxes since no actual injury was proven in court.
This is not true. It does not matter if you settle on the first day of bringing the lawsuit or on the last day before a verdict is read. If it was a personal injury case that was originally brought, it is not taxable.
This also includes if the case went to trial and there was a verdict in your favor. It is still not taxable if it was for physical injuries.
What about sickness or illness, are those settlements taxable?
No. A personal injury case that involves a plaintiff either getting sick through the fault of another is still considered a physical injury. So it is not taxable.
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What if my personal injury case involved breach of contract, is that taxable?
Sometimes a personal injury case will involve a breach of contract dispute of some kind. If the breach of contract is central to your personal injury case and was the main factor for your injuries occurring, then settlements or verdicts would be taxable.
This would also include things like lost wages or other penalties that were a result of the breach of contract.
Other Examples That May be Taxable
We covered some of the main scenarios above that are either taxable or non-taxable for most personal injury cases. However, there are some outliers and exemptions to the above rules which can cause some confusion.
Any deductions you made for medical expenses before your case was settled would be taxable once the settlement is paid. So if you deduct medical expenses in the year(s) prior to the settlement, you would need to pay taxes on that amount.
Another situation where you may be taxed on a portion of the settlement is if there was a lengthy appeals process that held up the payment of the settlement. In this case, interest would be accrued as the case continued. When the settlement is ultimately reached, it will include the interest accrued.
This interest would be taxed, as it’s not part of your actual settlement and is instead more like an investment return.
Read more: Are life insurance premiums tax-deductible?
Why are some settlements taxed and some are not?
This is difficult to answer as there are many factors involved. In general, personal injury settlements are not taxed because they are seen as a reimbursement.
Say for instance you were injured and it cost you $10,000 to pay for medical treatments or copays for your health insurance. If you were awarded $10,000 in a settlement, that would be a reimbursement. It would seem illogical to tax someone on money that was meant to repay a bill. Therefore, all physical injury costs are not taxable in most cases.
Read more: How To Negotiate a Bodily Injury Settlement.
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Case Studies: Is a Personal Injury Settlement taxable?
Case Study 1: The Smith Family vs. Guardian Insurance Company
The Smith family filed a personal injury claim against Guardian Insurance Company following a car accident caused by one of their insured drivers. The court awarded them a $100,000 settlement for medical expenses, lost wages, and pain and suffering. The Smith family sought guidance to determine if the settlement was taxable.
After consulting with tax experts, it was determined that the settlement was entirely non-taxable. The entire amount was allocated to cover medical expenses and compensate for pain and suffering, which are generally considered non-taxable under the current tax laws.
Case Study 2: John Davis vs. Liberty Insurance Corporation
John Davis, an employee of a construction company, suffered a severe back injury while working on a construction site due to the negligence of a subcontractor. After filing a personal injury claim against Liberty Insurance Corporation, the court awarded him a settlement of $500,000 to cover medical bills, lost wages, and future rehabilitation costs.
The settlement in this case was divided into categories. The portion for medical bills and lost wages was deemed non-taxable, but the portion for future rehabilitation costs was considered taxable. Since future medical expenses could potentially replace income, they were subject to taxation.
Case Study 3: Sarah Johnson vs. Secure Insurance Group
Sarah Johnson, a pedestrian, was struck by a vehicle insured by Secure Insurance Group. As a result of the accident, Sarah suffered a severe leg injury and incurred substantial medical expenses. The court awarded her a settlement of $200,000 to cover medical bills, pain and suffering, and ongoing physical therapy.
Upon review, the settlement was found to have a non-taxable portion for medical bills and pain and suffering. However, the amount designated for ongoing physical therapy was taxable. The ongoing nature of the therapy indicated potential future income replacement, leading to its taxability.
Should I talk with my lawyer about these issues if I have questions?
As your case approaches settlement talks or a trial, you can ask your attorney about the tax implications of how the structure of your requested settlement impacts that.
Generally, your lawyer will attempt to structure the settlement in a way that lessens the tax burden. Sometimes this is not entirely possible though. Still, it’s a good idea to at least discuss this aspect with your lawyer before settlements or verdicts are reached.
Once you do receive your personal injury settlement, you will then need to consult a tax professional. Once the settlement is made and the money transferred, it is now a tax issue and your personal injury lawyer can most likely not provide advice on that topic.
As mentioned, a personal injury case is not something we ever want to be involved in. They can be stressful and painful, and can take years to finally reach a resolution. However, thankfully we have these tools available so those who have suffered injuries can at least be financially compensated for their injuries and other losses — generally without an additional tax burden.
So now you should be much better informed on the tax implications of your personal injury case. However, for all specific questions, make sure to consult your attorney or tax professional.
Frequently Asked Questions
Is a personal injury settlement taxable?
In general, personal injury settlements are not taxable. The Internal Revenue Service (IRS) considers compensation received for personal physical injuries or illnesses to be non-taxable. This includes settlements obtained through negotiations, mediation, or court verdicts.
What types of personal injury settlements are typically non-taxable?
Personal injury settlements related to physical injuries or illnesses are usually non-taxable. This includes compensation for medical expenses, pain and suffering, emotional distress, and loss of consortium. It is important to consult a tax professional or attorney to determine the taxability of specific elements within a settlement.
Are there any exceptions to the tax-free nature of personal injury settlements?
Yes, there are certain exceptions. If a portion of the settlement is allocated to non-physical damages such as punitive damages, interest, or emotional distress without a related physical injury, that portion may be taxable. Additionally, if you claimed a tax deduction for medical expenses related to the injury in a previous year, any settlement amount received for those expenses may be subject to taxes.
Do I need to report a personal injury settlement on my tax return?
Typically, you do not need to report a personal injury settlement on your tax return if it is non-taxable. However, if you received a Form 1099-MISC or any other tax-related forms indicating the settlement amount, it is important to review and ensure its accuracy. If you believe the settlement was wrongly reported as taxable, you should consult a tax professional to rectify the situation.
What if my personal injury settlement includes compensation for lost wages or medical expenses?
Compensation received for lost wages due to a personal injury is generally taxable as it would have been included in your income had you not been injured. Similarly, if you claimed a tax deduction for medical expenses related to the injury in a previous year, any portion of the settlement specifically allocated to those expenses may be taxable. It is recommended to consult a tax professional for guidance on reporting such settlements correctly.
Your life insurance quotes are always free.
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Brandon Frady
Licensed Insurance Agent
Brandon Frady has been a licensed insurance agent and insurance office manager since 2018. He has experience in ventures from retail to finance, working positions from cashier to management, but it wasn’t until Brandon started working in the insurance industry that he truly felt at home in his career. In his day-to-day interactions, he aims to live out his business philosophy in how he treats hi...
Licensed Insurance Agent
Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.