Do You Have to Pay Taxes on Your Personal Injury Settlement?

Accidents caused by negligence resulting in physical harm or wrongful death are considered personal injury cases. If you’ve been injured, you can submit a claim to compensate for damages. But, does that mean you will have to pay taxes on the settlement obtained for your injuries?

Since you may be wondering whether personal injury claims are taxable, this article will help you find out. Learning about these settlements will give you insight into the final amount you’ll receive after taxes.

What is a Personal Injury Settlement?

A personal injury settlement is a monetary agreement between the plaintiff and the defendant, resolving the claim against the at-fault party. 

Usually, the defendant’s insurance initiates negotiations with your lawyer, offering compensation for medical bills, lost wages, emotional distress, property loss, pain, and suffering. 

Since settlements can be substantial, addressing taxes on personal injury settlements during legal negotiations is crucial.

Is Your Personal Injury Settlement Part of Your Income?

According to the IRS, income encompasses money, property, or services received. In the context of personal injury settlements, court awards, and damages are considered income in the form of money.

Are Settlements for Personal Injury Taxable?

In many states, including California, personal injury settlement amounts are typically not subject to taxes. These settlements are intended to compensate for your losses and injuries, not for the government’s benefit.

However, it’s important to note that if your settlement includes compensation for emotional distress or damages unrelated to your physical injuries, there might be potential tax implications in those specific cases.

Taxable Portions of a Personal Injury Settlement

Taxes on a personal injury settlement may be payable in certain circumstances:

Emotional Distress Unrelated to Physical Injury

Non-physical injuries such as defamation, mental anguish, and humiliation are taxable if they are not directly related to the accident. 

However, let’s say you suffered emotional distress from a dog bite incident, then the compensation for the injuries and emotional distress may be non-taxable. If the trauma is not connected to the attack, the settlement amount may be subject to taxes.

Punitive Damages and Interest

Unlike compensatory damages, which cover medical expenses and lost wages, punitive damages are intended to punish the defendant responsible for the victim’s harm. 

The additional punitive damages are fully taxable. Additionally, any interest earned on personal injury settlements is also considered taxable as interest income.

How to Limit Your Tax Liability

To reduce your tax burden on a personal injury settlement, you can negotiate the amount and its tax treatment with the other party. 

For example, you can allocate a specific dollar amount for confidentiality purposes, while the remaining portion serves as compensation for your physical injuries. 

By including a confidentiality agreement, you may avoid taxes on the allocated damages. Therefore, strategically allocating your settlement can help you minimize your tax liability.

Non-Taxable Portions of a Personal Injury Settlement

While some portions of personal injury settlements may be subject to taxes, California generally considers personal injury settlements as non-taxable. Here are some automatically tax-free portions:

Physical Injuries

Compensation for sustained physical injuries is tax-exempt. If your settlement relates to sickness or injuries from the accident, you’ll receive the full amount without tax deductions. Hence, no need to report it on income tax documents.

Loss of Income

Recovering damages for loss of income in a personal injury case is non-taxable in California. You’re entitled to reimbursement for estimated future lost wages due to the accident.

Emotional Distress Related to Physical Injury

If emotional distress is related to personal injury, your settlement is taxable. However, you can reduce tax amount by deducting medical expenses not yet claimed.

Property Loss

Compensation for property loss or damage in personal injury settlements is tax-exempt. Taxable only if it exceeds your estimated loss of value.

Wrongful Death Damages

Settlements for wrongful death cases are fully tax-exempt. Therefore, you’re entitled to the full amount for the loss of a loved one.

Talk to a Personal Injury Lawyer at Adamson Ahdoot

If you’re unsure whether you are subject to taxes on your personal injury settlement, we recommend you speak to an experienced lawyer from Adamson Ahdoot. With the help of an attorney, you can navigate your case with ease. Your lawyer can also answer your questions about your tax obligations.

At Adamson Ahdoot, you can trust that the best personal injury lawyers handle your case. Our law firm will give you the legal assistance you need depending on the accident and severity of your injuries. We are committed to putting people first. At Adamson Ahdoot, our team consists of experienced lawyers who have decades of combined legal experience handling personal injury cases.

However, for more questions about your personal injury case, feel free to call us at (800) 310-1606 to schedule your free consultation with a premier injury attorney. We offer free consultations available in both English and Spanish.