Do I Have to Pay Taxes on My Personal Injury Settlement?
For the most part, compensation resulting from a personal injury claim is not taxable by the state or federal government. There are important exceptions, however.
Compensation from an accident that is not taxed
For the most part, the government will not tax your financial recovery directly related to a personal injury or illness claim. This is only fair, as these damages directly compensate you for your medical bills and other expenses. You will not be required to pay taxes on this amount whether you resolve the case through a settlement or obtain a judgment at trial. This rule applies not only to the state government but to the Internal Revenue Service as well.
As long as the damages are a direct result of an injury or illness, they are not taxable. This includes more than compensation for your medical bills. Any monetary damages for your lost wages or emotional distress will not be taxable as long as they are tied to a bodily injury or illness. The same is true for things like your pain and suffering or the loss of consortium. Even any compensation you receive for attorney’s fees are not taxable in this situation.
While these rules apply to physical injuries in auto accident cases, there are a variety of claims where the damages are not taxable. Illnesses that are caused by another person’s negligence also apply.
Some types of compensation are always taxable, even when they result from a personal injury claim. The most common example are punitive damages. Punitive damages are intended to punish a defendant for their egregious conduct, not reward a plaintiff for their injuries. As such, they are not treated as resulting from a personal injury for tax purposes.
Another example that could result from a personal injury claim is any interest paid. When judgments are taken, the state applies interest if they are not paid immediately. A plaintiff must pay taxes on any interest they eventually collect on their personal injury claim.
Finally, certain types of claims will require payment of income taxes even if an injury was involved. For example, the proceeds from a breach of contract claim are taxable even if they result in bodily injury.
Whether or not damages for emotional losses are taxable can depend on the circumstances. Emotional damages like mental anguish may be taxable if they are unrelated to a physical injury. That said, if a bodily injury or illness is in any way responsible for these emotional damages there is no need to pay taxes.
Let Chaffin Luhana help you get the most from your injury claim
If you are ready to move forward with a personal injury claim, it is important that consider the tax implications. While many settlements will not result in a tax bill, certain portions of a judgment or monetary settlement could be taxable depending on the circumstances. Understanding the various tax implications of an injury claim could save you tremendous headaches in the future when your tax bill comes due.
At Chaffin Luhana, we are dedicated to helping you obtain the compensation you deserve. While we negotiate settlements in the majority of our injury claims, we will never resolve a case for less than it is worth. To get the most out of your injury claim, schedule a free consultation with a Pittsburgh personal injury attorney at Chaffin Luhana right away.