Are Personal Injury Settlements Taxable?

If you are seeking a personal injury claim against the party responsible for your accident, you want to keep as much of the settlement as possible. The final settlement amount is meant to compensate you for the losses you incurred from the accident. Having to set aside some of that compensation for taxes may feel disheartening. 

 Are personal injury settlements taxable? Not usually, but certain damages might be.

Exploring Taxable and Non-Taxable Portions of a Settlement

Rest assured that the majority of personal injury settlements usually do not face tax implications. You should be able to keep the bulk of your settlement, as only specific damages are taxable. But knowing about these in advance can help you financially prepare to pay taxes on them. 

Under IRS regulations, you may owe the federal income tax rate on damages that the IRS considers income. These rates vary from year to year and by the amount of money you earn. 

Which Parts of a Settlement Are Not Considered Taxable Income?

The IRS does not consider several components of a personal injury settlement to be taxable income. You likely won’t need to pay taxes on any of the following:

• Settlements from the majority of physical injuries: If you received funds to cover medical bills, ambulance fees, at-home medical equipment, or other expenses related to physical injuries, these usually are not taxed. 
• Property loss damages: The same goes for damages that compensate you for property loss, such as the cost to repair or replace your vehicle. 
• Emotional distress directly resulting from physical injury: While emotional distress and related damages are generally taxable, if they tie directly to physical injuries, they may not be. 
• Settlements from insurance companies: The money you receive from an insurance company generally does not incur tax liability. Insurers provide payouts to reimburse you for monetary losses like property damage and medical costs. 

You normally won’t owe tax on these portions because they directly compensate you for losses. You can think of them almost as a reimbursement, which generally is not taxed. 

Which Damages Are Taxable? 

Are personal injury settlements taxable? Certain portions of them may be, such as: 

• Punitive damages, which come directly from the defendant’s bank account. These damages are not intended to compensate you but to punish the at-fault party. 
• Any interest you gained on the settlement, which may have accrued if the case took a long time to settle
• Non-physical injuries you claimed in the case, such as loss of companionship  
• Damages to compensate you for past or future lost income, which would normally be taxed if not obtained through a lawsuit

These may be taxed at the federal income tax rate, which generally ranges somewhere between 10% and 40%. 

Other Tax Considerations To Keep in Mind 

Accident settlements can take quite a while to come to fruition, and several tax seasons may have passed since the beginning of your case. Medical expenses are generally tax-deductible, and you may have claimed them on your taxes in a previous year. If you took out an itemized deduction on these costs, you may now need to pay taxes on that portion of the settlement. 

Always talk to a tax professional for specific guidance about filing taxes on personal injury settlements. You don’t want to risk claiming any components incorrectly and incurring penalties that eat away at the value of your compensatory damages. 

Schedule a Consultation With Our Personal Injury Lawyers for More Information 

Are personal injury settlements taxable? Generally not, though some damages may be. You can maximize the compensation you walk away with from a personal injury case by working with experienced, knowledgeable attorneys. 

At The Voorhies Law Firm, we have helped clients recover tens of millions of dollars in compensation. Contact us today at (504) 313-3086 or reach out online for a free consultation.