If you have received a personal injury settlement or are considering pursuing one, you may be wondering how this may affect your taxes. You’re probably wondering which parts, if any, of your settlement you’re required to pay taxes on. Put simply, most components of personal injury settlements are not taxable, but there are important exceptions. It’s advisable to seek the help of an experienced personal injury attorney so that your settlement negotiations reflect these tax concerns. Moreover, an attorney can help you structure your claims and settlement to minimize the taxability of your award and maximize what you’re talking home.

personal injury taxes

What Parts of My Settlement Are Taxable?

While much of your personal injury settlement is not taxable, there are some notable exceptions. Unfortunately, taxes do not apply to your settlement as a whole, but will apply to different components of it. The following components are considered taxable and you will be subject to paying taxes on them if you receive an applicable settlement.

  • Tax-deducted medical bills. If you paid medical bills relating to the injury for which you are receiving the settlement and later deducted them from your taxes, you will be expected to pay taxes if you are reimbursed for those costs in your settlement.
  • Breach of contract claims. If a breach of contract action is involved in your settlement, you will be expected to pay taxes on the damages related to the breach of contract. 
  • Punitive damages. Punitive damages are a kind of damage that are awarded to plaintiffs when regular damages do not suffice for the severity of the defendant’s actions and for the severity of the injury. These kinds of damages often come into play when the court finds that there was malice on the part of the defendant. You will be expected to pay taxes on any awards for punitive damages you receive as part of your settlement.
  • Invisible injuries. The IRS taxes any settlement award allocated for injuries that aren’t visible to the naked eye or that do not result from a visible injury. Therefore, settlement awards based on an injury that was not visible are taxable and you will be expected to pay taxes on any award for an invisible injury. However, if the invisible injury, such as emotional distress, is a direct result of a physical injury, you will not be expected to pay taxes on the award.
  • Interest on the judgement. If you win a settlement but don’t receive the full amount for some time, any interest you are rewarded as a result is taxable and you will be expected to pay taxes on that interest.

What Parts of My Settlement Are Not Taxable?

The great majority of your personal injury settlement will likely not be taxable. This is because the IRS views this settlement as reimbursement for a loss that you have or will suffer as a result of your injuries, and therefore it is not a form of income. These non-taxable components include the following:

  • Direct compensation for treatment of the physical injuries such as medical bills, physical therapy or rehabilitation, prescription costs, and the costs for medical assistance devices.
  • Pain and suffering as a result of the injury.
  • Emotional distress directly stemming from a physical injury.
  • Lost wages.
  • Lost earning potential.
  • Attorney’s fees.

Do I Have to Report My Settlement to the IRS?

Unless your personal injury settlement only included compensation for physical injuries or physical sickness (not emotional distress) and you did not make any itemized deductions on your taxes for medical expenses as a result of the injury, you will need to report your settlement to the IRS. Failing to notify the IRS and pay the required taxes could lead to further legal trouble.

Maximize Your Settlement Amount with the Experienced Team of Attorneys at Territorial Law

With over 60 years of experience representing the people of Yuma and beyond, the skilled attorneys at Territorial Law can help you with all your personal injury lawsuit needs. Our team understands that behind a personal injury case is a person who deserves tailored representation for their case, who deserves to recover for their losses, and who needs to hold the person or people responsible for their injuries accountable. At Territorial Law, we put our clients and their needs first. Not only will we listen to your story and advocate for you in negotiations with the defendant’s attorneys and insurance companies, but we are prepared to relentlessly fight for you in court if that’s what it takes to get you the settlement you deserve for your losses. Our results reflect our dedication to our clients, having recovered over $26 million in personal injury cases as of today. Contact us today for a free and confidential consultation and let us get started fighting for you.