Are Personal Injury Settlements Taxable?

Personal injury compensation is designed to make you whole following an accident that another person caused. By filing a lawsuit, you can recover money to cover damages such as medical expenses, lost wages, loss of earning capacity, and even pain and suffering.

As a victim, you may wonder are personal injury settlements taxable at the federal and state levels. This blog seeks to answer that question. Keep reading below.

Personal Injury Compensation and Federal Taxes

A personal injury settlement is typically not taxable at the federal level because these funds are intended to compensate victims for damages endured because of another person’s actions or lack thereof. 

As such, economic damages such as medical expenses and lost wages are tax-exempt at the federal level. The same case applies to non-economic damages like pain and suffering, as well as emotional suffering. 

However, non-economic damages are tax-exempt only when there is accompanying physical injury. 

For example, if you were involved in a car accident that caused mental trauma but weren’t physically injured, your compensation would attract federal taxes. 

To put it more concisely, economic damages are tax-exempt since they recover expenses related to your injury.

In contrast, non-economic damages are not taxable at the federal level because they facilitate compensation for damages that can’t be quantified in dollar terms, like pain and suffering. The government assumes that you have encountered a loss equal to the money you receive.

Personal Injury Compensation and State-Level Taxes

In Florida, personal injury compensation is typically non-taxable. However, there are situations when your settlement may attract taxes. They are outlined below: 

When Are Personal Injury Settlements Taxable?

Awards for lost income may sometimes attract taxes. The same case applies to punitive damages, intended to send a message of deterrence to the community and punish the defendant for their actions. 

This is because, according to the IRS, punitive damages are taxed as income. Finally, any interest from your settlement may also attract taxes. 

Along the same line, you may also owe taxes on a settlement for medical expenses, especially if you deduct medical costs as a loss on your tax return. 

Are Wrongful Death Settlements Taxable?

In the unfortunate event that your loved one succumbs to a personal injury incident, you are entitled to compensation through a wrongful death lawsuit. 

The damages for which the immediate family members will be eligible for compensation include medical bills incurred before the victim’s death, wages the deceased would have earned had the injury not occurred, emotional distress, and pain and suffering.

The good news is that wrongful death settlements typically don’t attract taxes at the state and federal levels.

Types of Non-Taxable Personal Injury Settlements

Most of the personal injury case settlements are non-taxable. Those include:

• Dog bites
• Wrongful death
• Car accidents
• Slip & fall accidents
• Trucking accidents
• Pedestrian accidents
• Motorcycle accidents
• Civil rights violation
• Bicycle accidents
• Product liability
• Defective medications
• Medical malpractice 

There are certain cases where personal injury settlements are taxable, like a certain portion of wrongful death suits. These often include some defect, neglect, and reckless act that resulted in the death.

For instance, if a person died because of the nursing home’s neglect, the court will compensate the family of the victim for medical expenses, financial support, and funeral costs. However, can also ask for punitive damages. These damages are taxable.

Workers’ compensation is another type that is often taxable. Most awards are not taxable at the state as well as the federal level. However, there are some exceptions, like:

• Interest paid on an award
• If the recipient had deducted medical expenses for sickness or work injury
• Retirement benefits, even if it is because of sickness or injury
• Receipients who get disability or supplemental income

Are Personal Injury Settlements Taxable? What Are The Types?

There are different types of injury settlements that are taxable. Those are:

Social Security Disability

A person getting disability benefits because of a personal injury is taxable. However, most of the receipients do not get enough money to owe to IRS. the only exception to this rule is when the spouse of the recipient get them into aa tax bucket.

The IRS determines the taxes by taking half of the disability benefits and adding them to the income of the spouse. For unmarried individuals, the amount has to be under $25,000 to be non-taxable. For married couples, the amount is $32,000.

Non-visible Dmages

The IRS commonly taxes compensation for symptoms that are non-visible. For instance, if someone got a stomachache because of a traumatic incident, the IRS will charge taxes for those injury compensations.

However, there are certain exceptions to this rule. For example, if someone broke a leg in a car accident, it can cause PTSD. Even if the injury is not visible, the compensation someone got because of this damage will not be taxed as it will be on account of the broken bones.

Moreover, any medical expense incurred because of a non-visible injury is tax-exempt. For example, counseling costs for emotional distress falls under the non-taxable portion of personal injury settlement. 

Criminal Justice Awards

Criminal justice case awards that do not involve any injury are mostly taxable by the IRS. For instance, if you own a business and there is a break-in, but no one is injured, the award you got to fix the damages would be taxed.

Wrapping Up on Settlements and Taxes

Are personal injury settlements taxable? Most of the time, personal injury settlements are non-taxable at both the state and federal levels. However, punitive damages are taxable since the IRS treats them as income. 

At the same time, damages for emotional distress without physical harm also draw tax obligations. Any interest on your settlement over the years will also draw taxes.

Also, if you receive compensation for medical expenses for which you had already declared losses on your returns, you will owe a portion of your settlement to the IRS.
“It’s best to consult a qualified personal injury attorney for advice on any tax obligations on your settlement money,” says personal injury attorney Christopher Largey of Largey Law.

Read More:

• A Detailed Look At Eligibility Criteria For Workers’ Compensation
• Employee Rights You Didn’t Know About But You MUST
• Addressing Long-Term Impact of Work Injuries