Do You Pay Taxes On Personal Injury Settlements? What To Know

If you’ve been injured and have received a personal injury settlement, one of the questions you may have is, Do you pay taxes on personal injury settlements? After all, the IRS taxes many types of income, and it’s natural to wonder whether your settlement is subject to tax. 

At Freeman Injury Law, we understand that navigating legal and financial questions after an accident can be overwhelming. No matter if you’ve been in a car accident, slip-and-fall incident, or trucking accident, we’re here to help you understand your rights and what you may owe in taxes regarding your settlement.

What is Typically Excluded from Taxes?

In general, compensation for personal injuries or sickness is not taxable. The IRS typically excludes settlements for physical injuries or illnesses from taxable income, but the rules change depending on what the settlement covers.

Injury or Sickness Damages

If you receive a settlement for physical injuries or sickness and did not take an itemized tax deduction for medical expenses related to those injuries, your settlement is generally not taxable. This means that compensation for things like medical bills, hospital expenses, lost wages due to your injury, or emotional distress related to physical harm are typically excluded from taxable income.

However, if you previously deducted medical expenses for the injury on your taxes, part of your settlement may be taxable. Specifically, if you deducted medical expenses related to the injury or sickness in prior years, you may need to report the amount of your settlement that corresponds to these expenses.

For example, if you deducted medical bills in a previous tax year and later received compensation for those bills in a settlement, the portion of the settlement related to those expenses is taxable. You’ll need to report this amount on your tax return.

What About Pain and Suffering?

When it comes to pain and suffering, the situation becomes more complex. Many personal injury cases include damages for pain and suffering as part of the settlement. These damages are meant to compensate for the emotional and psychological impact of the injury.

While the damages for physical injury or sickness are generally not taxable, pain and suffering awards that do not arise from a physical injury or illness are taxable. 

For example, if your emotional distress stems from a non-physical incident (such as a truck accident causing mental anguish but no physical injury), those damages may be considered taxable income. It’s important to reach out to a trucking accident lawyer who can assist you in such cases.

If your pain and suffering damages are taxable, they will be included in your income tax calculations, and you may be required to pay taxes on that portion of the settlement.

What About Property Damage?

If part of your settlement compensates you for property damage, such as repairs to your car following a car accident, this portion is typically not taxable. However, your car accident lawyer will inform you that if your compensation exceeds the actual value of your property loss, the excess amount may be considered taxable.

For instance, if your car was valued at $10,000 and your settlement totaled $12,000, the $2,000 exceeding the car’s value could be taxed. The IRS treats this excess as “profit” from the sale or replacement of property, making it potentially taxable income.

Are Punitive Damages Taxable?

Punitive damages are awarded to punish a defendant for particularly egregious actions and to discourage similar behavior in the future. These damages are not meant to compensate the victim but act as a financial penalty for the defendant.

Punitive damages are considered taxable and must be reported as income on your tax return. If your settlement includes punitive damages, that amount should be added to your total income for the year. Taxes will likely apply to the portion of the settlement designated as punitive damages.

What About Settlements for Wrongful Death?

In wrongful death cases, settlements often cover lost income, funeral expenses, and pain and suffering. Compensation for funeral expenses or lost financial support is generally not taxable. However, amounts awarded for emotional distress or loss of companionship may be subject to taxation, depending on the specific circumstances of the case.

Taxable Settlements and Reporting to the IRS

If a portion of your settlement is taxable, the IRS requires you to report that income on your tax return. The taxable amount of your settlement will be included in your gross income for the year and could increase your tax liability. 

To avoid issues with the IRS, it’s crucial to report any taxable portions of your settlement, especially for pain and suffering, punitive damages, or any property damage compensation above the actual value of the loss. When in doubt, speak with your attorney or a tax professional to help you navigate the reporting process and determine what portion of your settlement, if any, is taxable.

How a Personal Injury Lawyer Can Help

Navigating the complexities of personal injury settlements and understanding what is taxable can be confusing. A personal injury lawyer is invaluable in ensuring you understand every aspect of your case, including any potential tax obligations. They can help you manage the legal details of your claim while advising you on how to handle the tax implications of your settlement.

A personal injury lawyer will assist in:

• Clarifying taxable and non-taxable portions of your settlement: They can explain what portions of your compensation are subject to tax and help you avoid confusion.
• Negotiating fair settlements: Your lawyer will work to ensure you receive the maximum compensation available, addressing all aspects of your losses, including medical expenses, lost wages, and pain and suffering.
• Tax guidance: While your lawyer is not a tax expert, they can work alongside you and your accountant to ensure you have the proper documentation and understand the reporting process.
• Protecting your rights: With an attorney handling your case, you can focus on your recovery while they handle negotiations with the insurance companies and any tax concerns.

At Freeman Injury Law, we not only fight for your compensation but also help guide you through the intricacies of your settlement, including any potential tax issues. Our goal is to make sure that you receive fair compensation without any surprises when tax season arrives.

If you’ve been injured, be it through slip and fall, automotive incidents, or even medical malpractice, our attorneys are here to support you. Contact Freeman Injury Law today to learn more about your case and speak with an experienced attorney who can help you with your personal injury claim.