Are Personal Injury Settlements Taxable?

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Emotional, mental, and physical injuries from a major automobile accident can significantly impact your life. Not only can these adversities affect you long-term, but they can also cost substantial amounts of money. Luckily, filing a personal injury claim with professional legal counsel can help you build a case and fight for compensation.

After receiving a settlement for personal injury, many ask, “Are personal injury settlements taxable?” Many factors influence how much tax comes from your personal injury settlement amount. Working with personal injury lawyers to understand the tax implications of these settlements can provide a glimpse into the tax bill you might receive from your case.

Will I Pay Tax on the Amount I Receive for a Personal Injury Settlement?

There is no cut-and-dry answer to whether you’ll pay tax on your settlement. Instead of wondering, “Are personal injury settlements taxable?” the more important question is, “What compensation is taxable income?” 

The IRS defines your taxable income as any cash source contributing to your gross income. While this includes an injury settlement on paper, policies exclude compensation for physical injuries. Therefore, you may only pay tax on portions of your accommodation.

Taxability with Different Categories of Compensation

To understand which parts of your settlement might merit a tax bill, read below about some of the different categories of compensation and their taxability.

Medical Expenses

Any compensation directly resulting from physical injury is not eligible for taxation. Since the compensation for medical expenses correlates to your physical ailments from an accident, there will be no tax on this portion of your settlement. 

Pain and Suffering

Pain and suffering is another section of compensation that results directly from physical injury, so it also won’t receive tax eligibility. This category may include chronic pain after an accident to emotional and mental trauma. Keeping records of your ongoing medical expenses and mental health treatment following an accident will help you construct a strong case.

Lost Wages and Wrongful Termination

Since gross income is the main form of individual taxation in the U.S., compensation for lost wages and wrongful termination will receive a tax. These categories provide more insight into the tax dichotomy of personal injury settlements: non-taxable physical injury compensation vs. taxable wage-based accommodations.

Emotional Distress, Loss of Interest, or Harassment

These categories within personal injury settlements can be tricky. For example, emotional distress and loss of interest will only receive taxes if these result from lost wages rather than physical injuries. However, harassment is pain and suffering and excludes tax eligibility. 

Punitive Damages, Defamation, and Discrimination

Punitive damages punish the defendant or perpetrator in an accident. These damages are external to typical physical or mental compensation, so they receive taxes.

Defamation and discrimination are other forms of lost wages or wrongful termination. Therefore, these forms of compensation will also have a tax.

Hire Legal Professionals from The Simmons Law Group

For more answers to the question “Are personal injury settlements taxable?” or for help choosing a personal injury lawyer, call (407) 454-3000 and schedule a consultation with legal professionals at The Simmons Law Group today!