Are Personal Injury Settlements Taxable?

No. In fact, personal injury settlements are one of the very few types of lawsuits that are actually tax-exempt. While the majority of lawsuit settlements are taxable, personal injury ones are not. No law firm or lawyer can say otherwise, regardless of the state you are living in.

For example, any Philadelphia personal injury lawyer will tell you that you do not owe the IRS anything if you happen to win a personal injury lawsuit and, consequently, receive compensation.

Non-taxable Lawsuit Settlements

There are a few types of non-taxable lawsuit settlements apart from personal injuries such as slipping and falling.

Most notably, car accident settlements come to mind. Law firms and attorneys will be clear with you from the very beginning in such cases.

Defining Pain and Suffering

Legally speaking, pain and suffering lawsuit settlements are not seen as income by the IRS. You can claim other items such as loss of wages, emotional distress, medical bills, attorney fees, and loss of consortium apart from the original pain and suffering and still remain tax-exempt.

These are not considered punitive damages in personal injury lawsuits. Both federal law and state laws make it clear that any proceeds from most of the claims involving a personal injury are not taxable, regardless of whether you settled before or after filing a lawsuit.

Your settlement is going to be completely tax-free in terms of physical injury where you have demonstrated “observable bodily harm.” That is not the case for emotional distress. You are more likely to be taxed for any settlements for an emotional distress lawsuit.

Punitive Damages

A personal injury lawsuit can become eligible for punitive damages. For example, if a breach of contract was your basis for the lawsuit and the breach of contract causes you the injury, the settlement will be considered income/punitive damage and, as such, will be taxed.

You are not completely lost in this case. Lawyers generally ask the judge to separate the verdict into both categories: punitive damage and compensatory damage. So now, though a portion of the total settlement will be taxed, a portion will be kept aside.

Getting the compensatory part confirmed by the judge is critical. This single-handedly allows you to tell the IRS that the specific portion was not punitive damage and cannot be taxed.

Contact Our Experienced Personal Injury Lawyers

Looking for a Philadelphia personal injury lawyer? Personal injury cases are very different from other types of cases and can be a little more difficult than your average lawsuit.

It makes sense to check the track record and past success when you are looking for a law firm or attorney. Typically, law firms and lawyers specializing in personal injury cases might also specialize in one or two other fields. That is perfectly okay as long as they have a commendable track record in personal injury cases, like Philadelphia Injury Lawyers, P.C.

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