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Are Personal Injury Settlements Taxable?

Are Personal Injury Settlements Taxable?

the word "taxes" spelled out with scrabble tiles

For individuals pursuing a personal injury case, one of the last things on their minds is likely the tax implications. Because of this situation, we want to educate readers ahead of time and provide an answer to whether personal injury settlements are taxable or not. Additionally, the following post examines new considerations stemming from the 2017 Tax Cuts and Jobs Act, which among other things, changed what types of personal injury settlements could avoid taxation.

When Personal Injury Settlements are Not Taxable

Generally speaking, personal injury settlements are not taxable as they are not considered income. This is because an individual is receiving payments that cover damages, such as reimbursement for medical expenses or repairs. However, it is important to consider the particulars of your specific case, what expenses incurred during the lawsuit, what types of injuries occurred, and whether or not punitive damages were included.

Items typically free from taxation include:

  • Medical bills
  • Pain and suffering
  • Loss of consortium, which allows people to recover damages for the inability to fulfill spousal or parental duties
  • Attorney fees

When Personal Injury Settlements are Taxable

While the above situations may clear an individual of owing substantial taxes, they should bear in mind the following ways that taxes can be levied. Wages and itemized medical expenses claimed in a prior year’s tax return, for instance, are subject to taxation. Additionally, and as of the passing of the 2017 Tax Cuts and Jobs Act, “If the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, you must include them in your income.” If you are unclear about your settlement and want certainty, it is best to consult with an experienced personal injury attorney.

What Happens If Punitive Damages are Included in a Settlement?

Punitive damages are paid by a defendant as a form of punishment when it is determined that their conduct was exceptionally bad. These damages are considered above and beyond restitution for personal injuries and therefore are taxable.

Still Have Questions About Your Settlement’s Tax Liability?

Speak with the Albers & Associates legal team to help ensure your personal injury case and its potential settlement avoid mishaps related to taxation. Our team is available to speak over the phone or via the use of our contact form.