Is Your Personal Injury Settlement Taxable?

personal injury | March 30, 2022

After sustaining an injury caused by the actions of another individual or entity, victims should be able to recover various types of compensation for their losses. However, you need to know if personal injury settlements are taxable. It seems like taxes are inevitable in just about every type of situation, but you may be pleasantly surprised to learn that some of an injury settlement is not going to be taxable, though there are portions that could face taxation.

Is Your Personal Injury Settlement Taxable

Medical Bill Compensation and Taxes

Those who sustain injuries caused by the negligent actions of another individual or entity need to recover compensation for their medical bills. We need to point out that these are the types of expenses a person would never have experienced had they not sustained an injury in the first place. As such, any type of compensation that comes in as a result of another person’s actions is not taxable.

When a person receives a settlement from an insurance carrier or money through a jury verdict for their injuries, this will often include money to pay for hospital bills, doctor visits, prescription medications and medical devices, physical therapy and rehabilitation, in-home medical care, and travel to and from medical facilities.

The IRS will not tax the medical bill compensation portion of your settlement or jury verdict. If you have questions, speak with your personal injury lawyer.

Lost Wages and Taxes

It is not uncommon for individuals to be unable to work as a result of their injuries. In these situations, a settlement often includes compensation for lost wages. This includes any wages to make up for current time away from work as well as possible future lost earnings if an individual sustains a disability and cannot work for a long period of time.

In some cases, an injury victim may be able to work, but only at a lower-paying job until they fully recover. When that happens, lost wage compensation can make up the difference between what a person was making before their injury and what they are currently making at their new job.

Just like income before an injury, lost wage payments through an insurance settlement or a jury verdict do have to be claimed as income for tax purposes with state and federal tax agencies.

Pain and Suffering Damages and Taxes

Individuals who sustain injuries are often able to recover various types of non-economic losses, including physical and emotional pain and suffering damages, loss of quality of life damages, scarring and disfigurement damages, and more. Because these are other types of injuries that a person would not have sustained if not for the negligence of another, any compensation received for non-economic damages will not be taxable by the IRS or state agencies.

Punitive Damages and Taxes

Punitive damages are not awarded in every case, and they are reserved for situations where the actions of the defendant were found to be intentional or unfathomably reckless. Punitive damages are meant to send a message. They act as a punishment to the defendant, and they send a signal to other parties that they should not engage in this type of behavior. These damages are typically awarded on top of compensatory damages mentioned above, and they are typically taxable.