After you receive your personal injury settlement or verdict, you may breathe a sigh of relief. You may think that you’ll never have to give another thought to that case… until tax season rolls around. When it does, you may wonder: are personal injury settlements taxable? As with so many things associated with tax season, the answer can get complicated.
When Are Personal Injury Settlements Tax Exempt?
In most cases, your personal injury settlement is nontaxable. When you file a personal injury case, you are usually trying to recover the cost of damages so that your health, finances and property can be restored to what they were before the accident. This can include medical costs and repairs to property like your vehicle or your home. Your personal injury settlement will not be taxed if you were rewarded damages for:
Physical injuries or sickness. This means that the money you receive to cover your medical bills and treatments will not be taxed. The reasoning is that you are not keeping this money as income, but instead it is being used to restore you to the level of health you enjoyed before the accident that caused your injuries.
Property damage. The portion of your settlement that goes toward car or property repairs or replacement is not usually taxable, because it is being used to restore what you already owned.
Pain and suffering – but only if it resulted from physical injuries. Essentially, if your pain and suffering is actual, physical pain and suffering in the true, non-metaphorical sense, then the damages you receive as a result are nontaxable.
When Are Personal Injury Settlements Taxable?
Sometimes, personal injury cases involve more than just medical bills and expenses for physical therapy to get you literally back on your feet. Common awards in personal injury cases that are taxable include:
Lost wages. If you missed work as the result of your injury, you may be compensated for the money you could not earn at your job during your recovery time. Since your regular paycheck is taxed, so is your lost wages settlement.
Interest. Sometimes, if your settlement or verdict award is delayed, it may accrue interest. While the settlement itself may be exempt, you almost always have to pay taxes on the amount of interest you get.
Punitive damages. An award for punitive damages is meant to punish the person responsible for the accident. Since this money is not going toward your medical bills or restoring your property, it is fully taxable by the IRS.
Pain and suffering – if it is not related to physical injuries. If you are filing for mental pain and suffering, like the anguish you feel as the result of workplace discrimination, that money is probably subject to taxes.
No matter how much you are awarded in an injury settlement, it is a good idea to ask your personal injury attorney whether you will have to pay taxes on the money you receive. Whether you will report it as an exemption or as taxable income, you should always keep all paperwork relating to your settlement at least until the next time you file your taxes.
Our Illinois and Missouri personal injury attorneys can answer your questions about personal injury cases and settlements. Call our office today to schedule a free consultation. The information provided by Walton Telken Foster, LLC in this Blog is not intended to be legal advice, but merely provides general information related to common legal issues. This Blog, and the information contained within it, is Attorney Advertisement. The choice of a lawyer is an important decision and should not be based solely upon advertisements. Past results afford no guarantee of future results. Every case is different and must be judged on its own merits.