If you have received a personal injury settlement or are about to receive a settlement due to a personal injury; it is important to understand the tax implications. Our information below is for general purposes only and you should contact an accountant for information relating your specific situation.
Rule for Taxing a Personal Injury Settlement
In general, most personal injury settlements and awards are not taxable as federal or state income tax. The tax code states that money recovered for a physical injury is not considered income. This includes, but is not limited to, payment for lost wages, medical bills, emotion distress (accompanied by physical injury), pain and suffering, attorney fees, etc.
Money that is received due to a personal injury settlement is typically not considered income. It is usually considered a method of making someone whole for losses attributed to the injury and therefor isn't typically taxed. Emotional distress, when not associated with a physical injury is typically included as taxable income. Non-punitive damages received for personal injuries are excluded while, punitive damages are taxable income.
Below is a list of various awards and settlements that are typically taxable.
Personal Injury Settlements and Awards That Are Not Taxable:
- Physical Injuries Accompanied by Emotional Distress
- Wrongful Death
- Lost Services of Injured Children
- Lost Wages (Due to physical injury or sickness)
- Lost Consortium Due to Spouse's Physical Injury
- Bystander Claims of Negligent Infliction of Emotional Distress
- Attorney's Fees Associated with Non-Taxable Damages
Settlements and Awards That Are Taxable:
- Punitive Damages ( damages intended to reform or deter the defendant and others from engaging in conduct similar to that which formed the basis of the lawsuit.)
- Emotional Distress (when not accompanying a physical injury)
- Pre-Judgment/Post-Judgment Interest
- Interest Earned on Lump Sum Judgments or Settlements
- Attorney's Fees Associated with Taxable Damages