Answer from a Pro: Are Personal Injury Settlements Taxable?

Are personal injury settlements taxable? It’s a great question, especially should you receive a significant sum of financial compensation. After all, we’re used to some amount of money we earned or won going to the government whenever we receive this money and each year when we do our taxes.

In this blog, we will explore the tax implications of personal injury settlements, including what portions of a settlement may be taxable, and how to navigate the complex world of tax law when seeking compensation for a personal injury.

What Portions of an Injury Settlement Is Taxable?

It’s not likely that your entire personal injury settlement will be taxable, since its award as a result of negotiations to compensate you for damages. Yet, there are certain situations where your financial compensation for a personal injury may indeed be taxed.

When can personal injury settlement be taxed by the IRS? Here are a few examples:

Compensation for emotional distress, like pain and suffering, is only non-taxable if coupled with a physical injury. Otherwise it loses its tax-free status. Likewise, invisible injuries like headaches when caused by emotional distress will be taxed when compensated. Your injury settlement will not be taxed if the invisible injury comes from a physical illness or injury.

If you also receive punitive damages from your accident settlement, those damages are typically taxable as income, as they are not considered compensation for physical injury or illness.

Compensation for lost wages may be taxable. This is because it is in direct relation with your job and your earned wages.

Workman’s compensation claims will be taxed if the worker had to retire due to injury. Depending on the amount of compensation, those previously collecting Social Security income or Disability income may see their benefits affected.

Interest earned on the settlement is taxed. So, if you earn a lump sum and place it in a high interest savings account, the IRS will tax the interest you earn while it sits in your bank.

Note: You must also report your compensation if you had claimed a tax deduction for your medical expenses. This applies to workman's compensation as well.

13 Types of Non-Taxable Injury Settlements

In general, these settlements will have tax-free status:

1. Slip and falls
2. Car accidents
3. Medical malpractice
4. Truck accidents
5. Dangerous products
6. Motorcycle accidents
7. Bike accidents
8. Boat accidents
9. Pedestrian accidents
10. Bus accidents
11. Dog bites
12. Worker’s comp
13. Wrongful death

Yet, just because you file a lawsuit for one of these injuries doesn’t necessarily mean you’re automatically off the hook for paying taxes on some part of your full award. Rather, there are some situations where you may be taxed on part or all of your financial compensation.

How to Navigate the Complex World of Tax Law

Navigating the complex world of tax law after receiving compensation for a personal injury can be daunting, but with the help of a tax professional and careful record-keeping, you can help ensure that you are meeting your tax obligations.

One of the most important steps you can take to ease the tax preparation process is to keep detailed records of your settlement, including:

• All correspondence
• Settlement agreements
• Receipts for any expenses related to your injury

This documentation will help you and your tax professional accurately report your taxable settlement amount on your tax return. Luckily, you should have all of this documentation already on hand from when you filed your injury claim.

More Than Just a Law Firm

If the above information and documentation requirements seem confusing, never fear. An experienced personal injury legal team, like those found at Lerner and Rowe Injury Attorneys, can help by answering basic questions and providing you or your tax professional with supportive documentation.

The nationwide firm has represented over 150,000 clients and helped recover billions in settlements for clients located across multiple states over the last 32 years. As such, it’s no wonder it has also built a reputation for going the extra mile and being more than just a law firm.

Lerner and Rowe’s team is dedicated to helping ensure that its clients' best interests are looked after. Contact Lerner and Rowe Injury Attorneys today for a free consultation should you or a loved one be in need of a personal injury lawyer in California, Arizona, Nevada, New Mexico, Alabama, Illinois, Indiana, Tennessee, Washington, or Oregon.