If you’ve received a personal injury settlement for lost wages, medical expenses, and pain and suffering; you may be wondering: Do you have to pay taxes on personal injury settlements? Personal injury settlements or jury awards are generally not considered to be taxable income by the IRS, and there is no need to report a settlement or jury award on your tax return.

There are exceptions to this general rule, however. Certain types of damages received in a settlement may be subject to income tax. The taxation of personal injury settlement amounts can get complicated, and it’s essential to consult with an experienced personal injury attorney.

When Are Personal Injury Settlements Tax-Free?

Federal law, and specifically Section 104 of Internal Revenue Code, clearly states that the following types of compensation are not considered taxable income:

• amounts received from worker’s compensation or similar laws as compensation for personal injuries or sickness;
• the amount of any damages (other than punitive damages) received for personal physical injuries or physical sickness;

Physical injuries can be very broadly defined, including internal damage, sickness, infection, and follow-up surgeries. Your settlement will be tax-free if it is related to physical injuries, such as car accident claims, defective medical device injuries, and whiplash claims, and includes compensation for medical bills, past and future loss of income, and pain and suffering.

Special Situations

Confidentiality Clauses: There is at least one case, involving ex-NBA star Dennis Rodman, where compensation paid to keep a settlement confidential was considered to be taxable income. However, that was a highly unusual case involving a celebrity defendant, and in almost all cases, the fact that your settlement includes an agreement to keep the settlement confidential does not convert the settlement into taxable income. This discussion applies only to cases involving physical injuries or physical sickness.

Non-Physical Injury Claims: The rules of the Internal Revenue Service are different for other types of claims, such as claims for purely emotional distress with no physical injuries, employment discrimination cases or disputes with an employer about compensation, such as wages, bonuses, or commissions.

Why Consult A Personal Injury Attorney?

Taxation of settlements can get complicated. An experienced personal injury attorney can:

• Ensure you claim all available damages

• Negotiate with insurance companies for fair compensation

• Advise on the tax implications of your settlement

• Help you comply with all IRS rules and avoid surprises at tax time

An attorney can ensure you file for all the damages available to you in your personal injury settlement. An attorney can also speak to the insurance company on your behalf to ensure you don’t get tricked into settling for an amount that may sound great at first blush but is actually more of a lowball offer.

Seeking Professional Help with Personal Injury Settlements and Taxes

A personal injury lawyer can help you navigate the tax implications of your settlement and ensure you comply with all tax laws.

If you have a question about the taxation of personal injury claims, or any other questions about a personal injury claim, please contact us to learn more about your right to obtain compensation for your injuries. These cases are handled on a contingent fee basis which means no money is owed unless we are successful in collecting money compensation on the case.

Contact us now at 508-543-3700 for a free and confidential consultation.