Are Personal Injury Settlements Taxable?
When you’ve been affected by someone else’s actions and ended up being hurt and suffering damages, a personal injury settlement is meant to work as a way to undo the damage and put you in the position you would have been in if the incident had never occurred. But do you need to worry about paying taxes on the money you received as a settlement? Our attorneys explain when a personal injury settlement may be subject to taxes and what to do if you need help.
What Is Included in a Personal Injury Settlement?
Most personal injury settlements include compensation for standard damages, which are economic and non-economic damages resulting from the event that led to an injury (such as a car accident or a slip-and-fall injury due to someone else’s negligence). Economic damages are financial losses and expenses resulting from the accident and can include medical bills, lost wages, and the cost of repairing or replacing damaged property. For example, if you were hurt in a car accident, economic damages may cover your hospital bills and the cost of replacing your vehicle.
Non-economic damages cover the more subjective impact of an accident and can include payment for pain, suffering, and emotional distress due to the accident, injury, and recovery process. In addition, some cases may allow for the plaintiff to recover punitive damages, which is additional compensation the defendant is required to pay on top of standard damages. Punitive damages may be available in cases involving gross negligence and act as a way to punish the defendant for their behavior.
Do I Have to Pay Taxes on My Personal Injury Settlement?
If you have received a significant lump sum as a result of a personal injury claim or lawsuit, it is important to know whether the money you received is taxable. The good news is that at the federal level, money received from a personal injury settlement is not counted as gross income and, thus, is not taxable. According to section 104 of the Internal Revenue Code, “(…), gross income does not include (1) amounts received under workmen’s compensation acts as compensation for personal injuries or sickness; (2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.
However, if you claimed an itemized deduction for medical expenses related to your personal injury claim and received money from the IRS for those deductions, you may have to pay taxes on the portion of your settlement meant to cover those medical expenses. For example, if you claimed $4000 in medical expenses in your tax return and received a refund based on those expenses, you may have to declare $4000 of your settlement as taxable income.
It is also worth mentioning that most personal injury settlements are generally not taxed at the state level. However, each state has different laws and exceptions, so you may want to consult the tax laws of your state to check whether you owe any taxes on your settlement.
Are Punitive Damages or Wrongful Death Settlements Taxable?
As explained above, punitive damages are meant to punish the defendant of a personal injury case when that person’s actions could be considered gross negligence. Punitive damages are paid in addition to standard damages and may be counted as taxable income. This is because the main objective of this category of damages is to punish egregious behavior rather than compensate the victim. In practical terms, it results in additional compensation for the plaintiff on top of whatever else they have received to make themselves “whole” and may therefore be subject to taxation.
On the other hand, a wrongful death settlement is meant to compensate the surviving relatives of a personal injury victim for the losses resulting from their loved one’s accident, injury, and death. A wrongful death settlement includes compensation for medical bills, funeral expenses, lost wages, loss of consortium, and pain and suffering the decedent may have endured during the accident. While no amount of compensation can make up for the loss of a loved one, the compensation given to relatives of a wrongful death victim is supposed to be a way to make them whole, i.e., to put them back in the state they were before the accident. For these reasons, wrongful death settlements are typically not taxable at the federal level and are usually paid to the decedent’s estate. As always, check the laws applicable to your state to determine whether any taxes are owed.
What Should I Do if I Am Still Not Sure About Paying Taxes on My Settlement?
It is normal to feel a bit confused about whether you owe any taxes on your settlement or not since the laws may be full of exceptions and difficult to understand. However, the last thing any personal injury plaintiff wants is to find themselves in trouble with the IRS after all they have endured. It is always best to talk to your attorney about any questions you may have, and you may also want to consult a tax professional.
If you have been hurt in an accident caused by someone else, the legal team at Armada Law is ready to help you fight for your rights. Our team serves injury victims in South Carolina, North Carolina, and Georgia. Reach out to our office by calling 866-934-6421 and requesting a free case review.