Are you charged taxes for any personal injury settlement you receive? Many personal injury cases are settled out of court. That means that only a small portion of cases will actually be tried. If you accept a settlement offer from the other person, you case is considered settled and there is no need for further action.
When a settlement has been reached, the defense attorney will then accept the offer on your behalf either by an email, phone call, fax message, letter, or maybe even a combination of ways. Once a settlement has been accepted, then what? While you probably imagine that money gets transferred into your account the next business day, it just doesn’t happen that soon.
Let’s start with a general rule. In most personal claim cases, the settlement amount is not taxable by federal or state law, regardless of it, if the case was settled prior to or after the lawsuit was filed. It doesn’t matter, if you went to court and won your case you shouldn’t have to pay taxes from a settlement. The only exception to this is if there was damages done that resulted to your personal physical injuries from the taxpayers’ gross amount.
To summarize, a typical personal injury compensated to the claimant for lost wages, emotional distress, medical expenses, suffering and pain, loss of consortium, or even attorney fees are not considered taxable as long as they are due to the personal injury or physical sickness. A physical sickness is defined as a claim for a certain illness. So if you were exposed to harmful bacteria that ended up making you sick, you would not be required to pay taxes.

Are there any exceptions to that Rule?

Regardless, if you suffered a personal injury or a physical sickness, you can be taxed on a breach of contract, as long as the breach of contract is what caused your illness or injury. Any further punitive damages can also be taxable. If you are filing a punitive damage claim, then your lawyer will ask the judge and jury to divide the verdict into compensatory damages and punitive damages. This will ensure that you can provide proof to the IRS which part was taxable and which part was not.
Interest on the judgement is also taxable. The interest will be charged until you receive your payment. If you won the trial on January 10, and the defendant decided to appeal the verdict, but didn’t give you any money until the following March, you will be charged for twenty-seven months of interest on the verdict.

Emotional Injury Claims

A settlement or verdict is only considered non-taxable, if it was due to a physical injury. If you had an accident that did not cause any physical injuries or damage and you suffer emotional distress or find it unable to work at your job prior to the injury, then any settlement that you receive will be taxed. The only exception to this is, if there is a proven physical injury.

Non-Taxable Settlement

You can do whatever you can, to make sure that most of your settlement is not taxed. When you have two claims against the defendant, one for the personal injury and one is not, the personal injury case is normally not taxed. You want to be able to state in your settlement agreement, the amount that is personal injury and the amount that is not from a personal injury claim. The revenue services, in some cases will challenge the settlement that is determined to be non-taxable so detailing your settlement is going to be the best alternative.