The Tax Consequences of a Settling a Personal Injury Claim

A common question that personal injury claimants think about upon the completion of their claim is whether their injury settlement counts as income for IRS tax purposes. The quick answer is that while most do not, there are exceptions.

To get the most precise answer that is specifically geared to your particular situation, you should consult your personal injury attorney as well as an accountant.

Categorization of Your Claim Makes a Difference

Your personal injury settlement may be taxable for IRS purposes depending on the type of case it involves and the type of compensation you have received for the injuries you have suffered. Generally speaking, compensation that is directly related to a physical injury or sickness is non-taxable or tax-free.

For instance, if you are injured in a car accident, incur $50,000 in medical expenses, and settle for $50,000 with the insurance company, you do not need to report the proceeds on your tax return. If any of these proceeds are for emotional distress or mental anguish that is directly related to your physical injuries, it is also non-taxable. In short, as long as your settlement is categorized as compensation related to an injury or sickness, the proceeds will be tax-free.

Exceptions to the Rule – Taxable Settlement Amounts

There are exceptions to the tax-free personal injury settlement rule. If your settlement proceeds are categorized as any of the following, you may be subject to paying taxes:

-          Punitive damage – Since punitive damages are designed as a punishment to the wrongdoer, the IRS wants a portion of it.

-          Accrued interest – Any amount you receive in your settlement that is attributed to interest is generally taxable.

-          Loss of income – Any portion of your settlement that is designated towards loss of income or for lost wages is taxable.

-          Emotional distress – If you are compensated for emotional distress or mental anguish that is not related to a physical injury or sickness, it will be taxable.

Call Us

For more information or to schedule a complimentary consultation with an experienced personal injury attorney, please call the Law Offices of Samer Habbas at (888) 848-5084.