Are Personal Injury Settlements Taxable? A Short Guide on What to Know

are personal injury settlements taxable

If you suffer an injury in an accident at no fault of your own, you deserve compensation. Once you receive your settlement, you have to consider the tax implications.

You should know whether you will have to pay taxes on your settlement or award. You may wonder how this could impact the compensation you receive.

If you’re asking are personal injury settlements taxable, we have some answers. Here’s a look at what you need to know.

Are Personal Injury Settlements Taxable

Typically, compensation from personal injury cases isn’t taxable under state or federal law. This general rule applies to insurance proceeds and judge or jury awards.

The intent of compensation in a personal injury case is to “make you whole” or pay you back for expenses you incurred as a result of your accident. The non-taxable rule applies to an accident victim’s physical injuries, medical bills, and related expenses.

Your medical expenses include the costs to diagnose, treat, cure, prevent, or mitigate a medical condition. If you have questions regarding your personal injury claim, consult an experienced personal injury attorney.

Exceptions for Non-Taxable Compensation

There are some exceptions to the rule of non-taxable compensation. If you deduct medical expenses on your prior year’s taxes, a portion of your reward is subject to taxability.

If your employer pays you wages as part of your settlement, you may have to pay taxes on this income. Other forms of compensation from a personal injury lawsuit may also be taxable.

Punitive Damages and Taxation

In most situations, punitive damages are taxable. A defendant may have to pay punitive damages as punishment for outrageous or egregious behavior.

The purpose of punitive damages is to deter other people from engaging in similar behavior. There are other instances where a personal injury settlement may be subject to taxation.

Punitive damages, previously deducted medical expenses, and interest on the original judgment during the appeals process may be subject to taxation.

2018 Tax Reform Law

In 2018 the “Tax Cuts and Jobs Act” was signed into law. This act contains significant changes to the rules regarding taxation of personal injury settlements and awards.

To qualify for the exclusion from federal taxation, your compensation must be directly related to your physical injuries. This means any money you receive for emotional distress or pain and suffering could be taxable.

In response to the Tax Cuts and Jobs Act, the IRS issued new regulations regarding personal injury settlements. Recipients may have to pay taxes on civil action awards.

Even when the plaintiff suffered physical symptoms such as headaches, stomach pain, or insomnia, they may have to pay taxes on a civil settlement or award. 

Find the Best Personal Injury Lawyer Near Me

You may wonder are personal injury settlements taxable. If you’ve suffered an injury at no fault of your own, you have enough to deal with.

During this difficult time, focus on your recovery and leave the legalities to an experienced personal injury attorney.

At the Overholt Law Firm, PC, we work tirelessly to protect our clients’ rights and ensure they receive the best possible outcome.

Our initial consultation is free. You pay nothing until you receive your settlement. Contact us today to discuss your case.

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