ClickCease
logo
GET STARTEDlinecall443-731-0267
What are you looking for?

Personal Injury Lawsuit Taxes

  • January 25, 2025
  • Justin
  • No Comments

Are Personal Injury Lawsuit Settlements Taxable?

First, a disclaimer because we are personal injury lawyers, not tax lawyers. Disclaimer: The information provided in this blog post is for general informational purposes only. It may be inaccurate. It does not constitute legal or tax advice. We are not tax professionals, and you should consult your accountant or a qualified tax advisor to fully understand the tax implications of your settlement or judgment.

When you receive compensation from a personal injury lawsuit, a questions that arises is whether you’ll owe taxes on the amount you receive. First, the answer depends on the nature of the settlement. The general rule is that the tax code excludes many types of personal injury awards from taxable income. However, certain portions may still be subject to taxation. Here’s what you need to know, based on a review of IRS guidelines and U.S. tax law.

General Rule: Physical Injury Settlements Are Not Taxable

According to the Internal Revenue Code (IRC) § 104(a)(2), taxes do not apply to damages a claimant receives for personal physical injuries or physical sickness. This means if you recovered compensation for medical expenses, lost wages, or emotional distress resulting from a physical injury, you typically won’t owe taxes on those amounts.

Exceptions to the Rule

While most physical injury settlements are not taxable, there are exceptions where certain portions of a settlement might be taxed:

1. Punitive Damages

Unlike compensatory damages, punitive damages are meant to punish the defendant rather than reimburse the plaintiff. Punitive damages are taxable and must be reported as income.

2. Emotional Distress (Without Physical Injury)

If you receive damages for emotional distress that are not directly tied to a physical injury or sickness, those damages may be taxable. For example, if your claim relates solely to mental anguish, the IRS may require you to include that compensation as income.

3. Interest on the Settlement or More Likely, Verdict

Any interest earned on a settlement or trial amount—such as interest accrued during the delay of payment—is taxable. Some courts allow pre or post judgment interest after a trial. If the Defendant takes two months to pay, a party may receive extra money beyond the trial verdict for physical unities. That interest earning is likely taxable.

4. Medical Expenses Previously Deducted

If you deducted medical expenses related to your injury in a previous tax year and later receive compensation for those expenses, you may need to include that portion of the settlement as income.

Some IRS Guidelines

For a detailed explanation of how settlements and judgments are treated for tax purposes, the IRS provides helpful resources. These include [Publication 4345](https://www.irs.gov/pub/irs-pdf/p4345.pdf), which specifically addresses the taxability of legal settlements and judgments. Additionally, the IRS outlines tax implications for settlements and judgments on its website: [Tax Implications of Settlements and Judgments](https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments).

Recovery of lost wages may be taxable

The guidelines note in part that if lost wages are unrelated to physical injuries or sickness, they are taxable.

What Should You Do?

Navigating the tax implications of a personal injury settlement can be complex, and the consequences of misreporting income can be significant. To ensure compliance and minimize any tax liability, consult a qualified tax professional or accountant. They can help you understand how your specific settlement will be treated under federal and state tax laws.

At Ketterer, Browne, and Davani, LLC, we are committed to helping our clients navigate the legal landscape of personal injury claims. While we cannot provide tax advice, we always recommend connecting with financial professionals to ensure you make informed decisions about your settlement.

If you have questions about your personal injury case or need legal assistance, feel free to contact us. Our personal injury lawyers are here to help you every step of the way.