Is a Personal Injury Settlement Taxable?

If you were involved in a accident, you will be entitled to compensation for your injuries. Generally, this process can take some time. However, it is important to know whether this type of settlement is subject to taxation.

IRS Rules on Personal Injury Settlements

So what does the IRS say? According to the IRS the taxability of a settlement will depend on a number of different factors. If the settlement is from a personal physical injuries you are NOT required to report that settlement as income. Monies from a personal injury award are not treated as income. You must report as income any portion of the award/settlement that is for medical expenses, which were deducted in prior years. Emotional distress awards from a personal injury lawsuit are also not subject to taxation. If the monies do not originate from a personal injury award, then they are considered taxable and SHOULD be reported as income. This is not universal for all types of personal injury cases. If for example you receive benefits from an employment claim, such monies may be subject to taxation. This includes wrongful termination claims, severance packages, overtime claims and other employment related awards. In such cases the amount of the award that covers wages is subject to taxation. Make sure to speak with an accountant after you receive your settlement and make sure to explain the purpose of the settlement. It is important that you are clear with regards to the purpose of personal injury award to avoid any issues. Where Can I Read More About This? In order to learn more about IRS taxation on settlements you can read the following article published directly on the IRS website. It includes additional resources and links for further reading. If you were involved in a car accident, motorcycle accident or any personal injury matter, know your rights. Educating yourself is one of the most important elements of any personal injury case. Knowing what your rights are will help you maximize the results of your settlement. Our offices are here to help explain or evaluate your case. Feel free to contact us anytime to discuss your claim, we are happy to assist.

Why Are These Settlements Not Taxable?

It is not really clear as to why the IRS has decided to not tax personal injury matters. Personal injury settlements are not considered income. They are to make the injured party whole again. Monetary damages are designed to make you, the injured party, able to live life again. If you were injured, it is likely that you will need medical attention and care. It would be improper to tax these types of benefits, since you are likely going to spend these monies on wellness and care. Additionally, how can you take monies from pain and suffering? This is not considered income under the eyes of the law and thus not taxable. It is important to mention that exceptions to this rule exist. Make sure you are aware of those exceptions before declaring anything on your tax returns or statements. Your attorney can guide you in the process. If you need additional clarification speak to an accountant. Further Information: Discharging Your Attorney