Taxes on Personal Injury Settlements
By Chris Kramer
Personal injury settlements bring welcome relief to thousands of injury sufferers each year. When settlements help compensate victims for financial losses, the money is usually free from income taxes.
Are Personal Injury Awards Taxable?
Usually, the only taxable forms of settlement money are punitive damages and relief awarded for legal, as opposed to physical, injuries. However, the tax consequences of each personal injury lawsuit may differ.
If you're curious about the financial impact of seeking personal injury compensation, connect with a local attorney for a free consultation today by filling out the form below:
When Does a Personal Injury Settlement Avoid Taxes
The question of paying taxes on a personal injury settlement is one of the most common concerns for people seeking legal relief for their injuries.
Usually, compensation received for physical injuries is not taxable as personal income. Examples of compensation for physical injuries include:
- Physical injury or sickness. If people receive compensation for broken limbs, debilitating illness, or other physical maladies, relief for these injuries is often tax-free.
- Emotional distress. Damages received for emotional distress are usually tax-free, as well, especially if the emotional distress is caused by a physical injury or sickness.
- Medical expenses. Medical bills from doctors' visits or hospitalization that were caused by a personal injury are typically free from income taxes.
- Lost wages. Sometimes, damages received for lost time at work are tax-free, even if those paychecks could have been taxed if the plaintiff had received them.
Also, it usually makes no difference whether the compensation for physical injuries is received in an out-of-court settlement, or as a result of a personal injury verdict. Both types of relief may be tax-free.
When Taxes are Paid on a Personal Injury Settlement
While most forms of injury relief are not taxable, there are a few types of compensation that may be subject to some taxation. These include:
- Punitive damages. This form of compensation is intended to punish the wrongdoer, not make the injured person whole again. As a result, punitive damages are usually taxable, though some exceptions may apply in wrongful death cases.
- Legal injuries. Payments for legal injuries are usually taxable. Legal injuries occur in the absence of physical wounds, and relate to claims such as discrimination, harassment, libel, and invasion of privacy.
To learn more about whether you will pay taxes on your personal injury settlement, contact a local injury lawyer today.