Is a personal injury settlement taxable?
Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
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Rachael Brennan
Licensed Insurance Agent
Benjamin Carr was a licensed insurance agent in Georgia and has two years’ experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.
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Former Licensed Life Insurance Agent
UPDATED: Mar 21, 2022
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Quick Facts
Personal injury settlements related to physical injuries are not taxable
Emotional injuries or punitive damages are taxable if included in the settlement
Personal injury cases that involve breach of contract are taxable in most cases
If you’ve suffered a personal injury that was the fault of another party, it can be an incredibly difficult time.
You may be dealing with an injury that is preventing you from working or even carrying out your simple day-to-day tasks. On top of that, you have the financial stress of not being able to work or having to pay for your treatment out of pocket.
Thankfully, this is where a personal injury attorney can help you. They can help get you a generous settlement to help offset your physical injuries and out of pocket expenses.
However, once your personal injury case is finished and you receive a cash settlement or favorable verdict, there can be more issues that need to be dealt with.
In this case, that’s whether or not your personal injury settlement or verdict is taxable, either by the federal government or state governments.
Is a personal injury settlement taxable?
For the most part, the answer is no. On the federal and state level, settlements or verdicts from a personal injury case are not taxable. This is true no matter the amount.
However, there are some special cases where either a portion of the settlement or the entire amount can be taxable. We’ll take a look at those below.
Compensation for Injuries Other Than Physical are Taxable
When talking about personal injury settlements or cases, we are most often talking about physical injuries that have been suffered. These can come from a car accident, a workplace accident, or almost any other type of situation where one party is at fault for causing injury to another.
But when it comes to taxes, only physical injuries are not taxable. Emotional injuries for example, are still fully taxable. So if your injuries were all emotional and there was no physical injury, you would need to pay taxes on the full amount of that settlement or verdict.
One thing to note though. Many times a settlement will have two components or more. So there may be physical injury and emotional injury. In this case, a competent lawyer will try to separate these two amounts to lessen the tax burden of having to pay on the full amount.
This may all sound complicated, but in general all physical related settlements are non-taxable. Any payout or portion of a payout related to non-physical injuries — pain and suffering, for example — are taxable.
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Are punitive damages in a personal injury case taxable?
Yes. Personal injury payouts that include punitive damages are taxable.
Punitive damages are those damages which are caused by conduct that is deemed especially egregious. So these payouts are above and beyond repayment for physical injuries, and are meant as a “punishment” for the other party. So therefore, punitive damages are always taxable since they aren’t directly related to the physical injuries.
Does it matter if the case was settled or needed to go to trial?
Many people mistakenly believe that if a personal injury case is settled, you will need to pay taxes since no actual injury was proven in court.
This is not true. It does not matter if you settle on the first day of bringing the lawsuit or on the last day before a verdict is read. If it was a personal injury case that was originally brought, it is not taxable.
This also includes if the case went to trial and there was a verdict in your favor. It is still not taxable if it was for physical injuries.
What about sickness or illness, are those settlements taxable?
No. A personal injury case that involves a plaintiff either getting sick through the fault of another is still considered a physical injury. So it is not taxable.
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What if my personal injury case involved breach of contract, is that taxable?
Sometimes a personal injury case will involve a breach of contract dispute of some kind. If the breach of contract is central to your personal injury case and was the main factor for your injuries occurring, then settlements or verdicts would be taxable.
This would also include things like lost wages or other penalties that were a result of the breach of contract.
Other Examples That May be Taxable
We covered some of the main scenarios above that are either taxable or non-taxable for most personal injury cases. However, there are some outliers and exemptions to the above rules which can cause some confusion.
Any deductions you made for medical expenses before your case was settled would be taxable once the settlement is paid. So if you deduct medical expenses in the year(s) prior to the settlement, you would need to pay taxes on that amount.
Another situation where you may be taxed on a portion of the settlement is if there was a lengthy appeals process that held up the payment of the settlement. In this case, interest would be accrued as the case continued. When the settlement is ultimately reached, it will include the interest accrued.
This interest would be taxed, as it’s not part of your actual settlement and is instead more like an investment return.
Why are some settlements taxed and some are not?
This is difficult to answer as there are many factors involved. In general, personal injury settlements are not taxed because they are seen as a reimbursement.
Say for instance you were injured and it cost you $10,000 to pay for medical treatments or copays for your health insurance. If you were awarded $10,000 in a settlement, that would be a reimbursement. It would seem illogical to tax someone on money that was meant to repay a bill. Therefore, all physical injury costs are not taxable in most cases.
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Should I talk with my lawyer about these issues if I have questions?
As your case approaches settlement talks or a trial, you can ask your attorney about the tax implications of how the structure of your requested settlement impacts that.
Generally, your lawyer will attempt to structure the settlement in a way that lessens the tax burden. Sometimes this is not entirely possible though. Still, it’s a good idea to at least discuss this aspect with your lawyer before settlements or verdicts are reached.
Once you do receive your personal injury settlement, you will then need to consult a tax professional. Once the settlement is made and the money transferred, it is now a tax issue and your personal injury lawyer can most likely not provide advice on that topic.
As mentioned, a personal injury case is not something we ever want to be involved in. They can be stressful and painful, and can take years to finally reach a resolution. However, thankfully we have these tools available so those who have suffered injuries can at least be financially compensated for their injuries and other losses — generally without an additional tax burden.
So now you should be much better informed on the tax implications of your personal injury case. However, for all specific questions, make sure to consult your attorney or tax professional.
