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Are Personal Injury Settlements Taxable?

are-personal-injury-settlements-taxable
November 10, 2021
Legally Reviewed By Rand Spear, Esq.

ARE PERSONAL INJURY SETTLEMENTS TAXABLE?

A settlement is one way to conclude a personal injury case. In a settlement, the parties involved choose to settle a case outside of court. In the final agreement, both the plaintiff and defendant usually agree to not pursue further legal action. When our clients pick-up their settlement checks from the Spear Greenfield offices, a common question asked is, “Do I need to pay taxes on my personal injury settlement?” This question does not have a simple answer, because there are many factors in play.  

The type of case and category of compensation are the two main factors for determining whether a personal injury settlement is taxable, nontaxable, or partially taxable. The general guideline from the IRS reads, “ If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable.” This means the tax liability of personal injury settlements is related to whether the specific compensation is related to physical injury or sickness. Below is additional information on whether a form of compensation from a settlement is taxable.

 

PHYSICAL INJURIES AND PHYSICAL SICKNESS

According to AllLaw.com, compensation for the physical injuries or physical sickness suffered in a personal injury accident are generally non-taxable. If medical expenses from the injury were previously deducted on your tax return, that amount is subject to taxes when the deduction provided a tax benefit.

LOST WAGES OR LOSS OF INCOME

If you did not suffer your personal injury, your employer would be paying you your wages. Those wages paid out to you are taxable, so lost wages or loss of income is taxable.

PUNITIVE DAMAGES

This compensation can sometimes go beyond typical compensation for injuries, because punitive damages are meant to punish the careless party. SInce they are not directly related to the injuries or illness suffered from the accident, punitive damages are generally taxable.

Ensure you speak with an experienced personal injury lawyer to answer the question, “Are personal injury settlements taxable?” It is important to determine the tax liability of personal injury settlements before accepting a settlement. Rand Spear and the Spear Greenfield legal team will provide analysis and research to determine whether a personal injury settlement is taxable. In our over 30 years in business, we represent our clients best interests by working with them and their tax advisor. Schedule a free consultation by calling us or completing our scheduling form.

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