It depends upon the type of settlement.
In this comprehensive article, the injury lawyers at Cousin Benny explain when injury settlements and judgments are taxable and how to minimize your tax liability when you get compensation for a injury claim.
If you suffered an injury in an accident, call Cousin Benny to find out how much your case is worth in your free, no-obligation consultation.
Is Compensation for a Physical Injury Taxable?
Typically, settlements and judgments that are compensation for injury are excluded from income on a federal tax return, however, there are exceptions.
Types of Non-Taxable Settlements
If a judgment or settlement is for medical bills and pain and suffering or emotional distress connected to an injury, that judgment or settlement is tax exempt. The IRS views this not as income but as a “compensatory” monetary award, meaning the injured person is being made whole with this money.
Other types of non-taxable settlements include compensation for:
- Injuries due to defective products
- Injuries on someone’s property
- Construction site injuries
- Injuries from car accidents
- Dog bite or attack injuries
- Injuries from medical malpractice
- Injuries from slip and fall or trip and fall accidents
- Injuries at the workplace (workers’ compensation)
- Wrongful death claims of the surviving family
- Restitution paid to crime victims
Exceptions That May Apply
If a judgment or settlement includes punitive damages, that portion of the award is taxable as regular income. Punitive damages are meant to punish the wrongdoer and dissuade others from engaging in that same conduct. The IRS considers punitive damages a windfall for the plaintiff and does tax them as income.
Other exceptions to the no-tax rule are:
- The injured party already deducted their related medical expenses on their tax return.
- Retirement benefits, even if the retirement resulted from an injury.
- Interest paid by the insurer on a workers’ compensation award.
- Interest paid by the defendant on a judgment.
- The settlement includes compensation for lost wages.
If the injured party receives Social Security Disability Income (SSDI) or Supplemental Security Income (SSI), they may see a reduction in those benefits after receiving a injury claim settlement.
Do You Pay Taxes for Emotional Injury Settlements?
Perhaps.
If your emotional injury, such as pain and suffering, emotional distress, or loss of enjoyment of life, was a result of your injury, you will not pay taxes on compensation you receive for that.
If your emotional distress claim is based on witnessing someone else getting injured or killed in an accident, it is taxable. Similarly, if you experienced emotional distress from a home invasion and robbery, compensation for that is taxable. In either of these examples, if you incurred medical expenses from your emotional distress such as medication and counseling sessions, compensation for that is not taxable.
How to Ensure As Much of Your Settlement is Non-Taxable as Possible
Your injury lawyer has experience structuring settlements to minimize your tax burden. For example, your lawyer may negotiate for a settlement for medical bills and related emotional injury and waive compensation for lost wages. Your lawyer might also agree to refrain from seeking punitive damages if the defendant settles for a larger amount in compensatory damages.
The IRS rarely interferes with settlements and what the parties to a settlement agreement state that the compensation is for. Your lawyer will negotiate with defendants to craft the settlement in such a way as to minimize your tax liability.
Consult a Philadelphia Injury Lawyer Today
If you suffered an injury and it was someone else’s fault, call the injury lawyers at Cousin Benny to discuss your case, free of charge. We help our clients get the compensation they deserve while minimizing their tax burden.
At Cousin Benny, we treat you like family. Call us today!
