Generally, you do not have to pay taxes on a personal injury settlement. Money awarded to compensate you for bodily injuries and for pain and suffering is tax free, because it is considered compensation for a loss. It’s not construed as earned income, so you do not have to pay taxes on it.
Similarly, money paid for property damage or for medical bills is not taxable, because it is offset by a loss.
However, there are several exceptions:
- Lost Wages/Lost Income. If a portion of your settlement was specifically designated as compensation for lost wages/lost income, this is taxable.
- Punitive Damages: Money paid for punitive damages are not exempt from tax. Punitive damages, also known as exemplary damages, are intended to punish the defendant for actions that are willful, wanton or reckless..
- Interest earned from invested personal Injury settlement proceeds: If you invest the settlement proceeds in a taxable investment, outside of certain kinds of trusts such as a Special Needs Trust, any interest, profit or gain is taxable.
When money is awarded after a trial pursuant to a jury’s verdict, the verdict sheet will state how much money is being paid for your pain and suffering, lost wages, medical bills, etc. The amount of your personal injury award which is subject to taxation will be determined by the jury verdict.
You should not rely on this information alone since the tax laws are subject to change and rules vary from state to state. You should consult with a knowledgeable attorney or a tax professional regarding your specific circumstances when you are in the process of settling your claim.
The knowledgeable personal injury attorneys at Parker Waichman LLP are aware of the tax implications of a personal injury settlement and will be able to assist you so as to minimize the taxation of it.