Are Personal Injury Settlements Taxable?

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Are Personal Injury Settlements Taxable?

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Posted By DAM Firm | November 1 2022 | Personal Injury

When a person sustains an injury caused by the negligence of another individual, business, or entity, they will likely be able to recover compensation for their losses. This compensation is meant to pay for expenses arising as a result of the injury. However, will a personal injury settlement or jury verdict be taxable by the IRS or state revenue officials?

The answer is that these settlements are typically not taxable, but there are some caveats to that that we want to discuss here.

are personal injury settlements taxable

Taxing Medical Expense Compensation

Perhaps the most important part of a personal injury settlement is the payment of medical expenses resulting from the injury and the recovery process. When we examine information from the Internal Revenue Service (IRS), we can see that any compensation for medical bills resulting from an injury settlement or jury verdict will not face taxes by the IRS. The state revenue service will also not pursue any payment from medical expense compensation. This includes coverage of medical bills, prescription meds, physical therapy or rehabilitation, and ongoing medical needs.

Taxes on Out-of-Pocket Costs

Individuals are often able to recover compensation for any out-of-pocket losses they endure as a result of the injury and the recovery. This can include the cost of traveling to and from medical facilities, the cost of renting vehicles, or payment for help with household services such as laundry or yard work. Just like medical expenses, the IRS and state revenue service will not pursue taxes from payment for out-of-pocket cost recuperation.

Pain and Suffering Damage Taxes

Individuals typically work to recover non-economic damages for their physical and mental pain and suffering caused by their injuries, the recovery, and any loss of enjoyment of life caused by the incident. Compensation recovery for pain and suffering losses can’t reach significant dollar values depending on the severity of the injuries. These non-economic losses will also not be taxed.

Taxing Lost Wage Recovery

Another important part of compensation recovery after an injury occurs is wage replacement or lost wage recovery. When a person sustains a severe injury and they cannot work, or if they have to take a lower paying job due to the injury, they will typically be able to request compensation for their lost wages. However, individuals will have to pay taxes on this portion of the settlement or jury verdict. The theory behind this is that an individual would otherwise have earned this money through a job and been paying taxes on it, so the replacement of those lost wages should also be taxed.

Work With an Attorney

If you or somebody you care about has been injured and sustained significant losses, you need to work with a skilled personal injury attorney as soon as possible. These claims can be challenging, and the best route towards receiving a fair settlement or jury verdict is having a legal advocate by your side with the resources necessary to fully investigate the incident and handle every aspect of the claim.

If you have any questions about taxation for a personal injury settlement or jury verdict you expect to receive, we encourage you to ask your attorney for guidance. You may need to work with a skilled accountant who can be involved as soon as you receive your settlement or jury verdict. They will be able to guide you when it comes to setting aside money for taxes if necessary.

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