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Is Your Personal Injury Settlement Taxable?

July 30, 2022

As you are engaged in a personal injury lawsuit, concerns about how much money you will acquire at the end of the process may arise. Firstly, you need to recover a settlement, but then, you may need to pay taxes on that settlement. Depending on where you live, the taxes may significantly reduce the full volume of compensation you recover through your claim.

Fortunately, personal injury settlements are only taxable sometimes. To find out when a personal injury settlement will be taxed, continue reading.

Is Your Personal Injury Settlement Taxable?

When Are Personal Injury Settlements Non-Taxable?

In general, you can expect that compensation received from personal injury claims will not be taxable income. However, this only holds true if the compensation recovered is associated with a physical injury or illness. For instance, if you were exposed to a harmful toxin at work and you filed a claim against your employer for the illness you suffered afterward, none of the compensation you recovered would be taxed.

Is It Different if my Case Goes to Trial?

Whether your settlement will be taxed does not depend on if your case goes to trial or not. If you settle before a personal injury lawsuit is filed through the courts, the same tax rules apply. Likewise, if you did go to court and win a verdict, the compensation you recovered would still be untaxed as long as it is associated with a physical injury or illness. This means that the state and federal governments will not typically tax damages received due to a person’s physical injuries or illnesses.

There are Some Exceptions

If you win punitive damages through a personal injury claim or criminal judgment, that compensation will always be taxed. Usually, your personal injury lawyer should request that punitive and criminal damages are separated when a verdict is issued. Doing so ensures that the IRS can recognize which compensation should be taxed and which portion should not be taxed. Though, this only applies when punitive damages are a part of your claim.

On another note, damages will be taxed when the injury or illness you suffered was caused by a breach of contract, and the related breach of contract is the reason you are suing. Another exception to the general rule is that interest on any judgment is taxable. If you did not know, courts often add interest that accrues for the amount of time a case has been pending.

You Will be Taxed for Emotional Injuries

If there was no physical injury or illness associated with your claim, the entire settlement you recover will be taxed. For example, pure employment discrimination cases that caused no injuries are subject to local, state, and federal taxation. Though, if you are able to prove that any form of injury occurred, the income would then not be eligible for taxation.

Minimize Taxes on Your Settlement

To ensure that your settlement is subject to the minimal amount of taxes, you need to arrange your claim in the most effective way possible. This is especially true in cases where multiple claims are made where one features physical injury and the other features none.

Having a lawyer from The Fang Law Firm will improve your ability to reduce taxes on your claims, so reach out today using the contact form on this page.