Do I Have to Pay Taxes On My Injury Settlement?

Posted on 05/17/23

in Personal Injury

When you’ve had an accident and sustained serious injuries, there are many things to consider as you deal with your physical and financial recovery. You may have mounting medical bills at the same time that you’ve been unable to return to work. With the help of an Oklahoma City injury attorney, a claim can be the answer to the damages you suffer, whether you recover your losses in an out-of-court settlement or from a lawsuit. During the distressing aftermath of a serious injury, many people don’t consider how an ample settlement affects their taxes until it’s time to file.

If you’ve recently gained a substantial sum in a settlement or court award, you may be wondering if the amount you’ve recovered in compensation for damages is taxable income. Like all things tax-related, there’s no simple answer.

When is a Settlement Non-Taxable Income?

Do I Have to Pay Taxes On My Injury Settlement?

In most cases, the IRS doesn’t consider the bulk of a personal injury claim as taxable income. If you’ve received a settlement from an insurance company or won compensation after courtroom litigation, the amount you’ve received is non-taxable income under the following circumstances:

  • If you recovered a settlement or court-awarded amount for medical expenses and did NOT take any itemized deductions for those expenses in a prior year
  • The amount of compensation you gained for pain and suffering and/or emotional anguish isn’t taxable if the damages resulted from the injury

Because compensation for damages is meant to replace the money you’ve already spent on the consequences of your injury, it’s only taxable under specific circumstances.

When is a Settlement for Personal Injury Taxable?

Depending on the unique circumstances of your case, some of your personal injury settlement or court-awarded compensation could be taxable. Anyone with a pending insurance claim or lawsuit should be prepared to keep copies of all financial documents and keep a diligent financial record. Often, tax consultants advise clients to report all gains to the IRS even if they might not be taxable, and allow the IRS to return the untaxable amount.

Typically a settlement is taxable under the following circumstances:

  • If you’ve already taken tax deductions for your medical expenses and received a tax benefit then you must declare the portion of your settlement allocated for medical expenses
  • If your settlement was substantial and earns interest, you must declare the interest amount as income
  • If you received an amount for emotional distress that wasn’t related to the actual injury, you must declare that amount
  • Amounts awarded to replace lost income may be taxable
  • If you received an amount for punitive damages (a sum of money meant to serve as a form of punishment and deterrent for extreme recklessness or wrongdoing on the part of the defendant) then you must declare that amount in your tax filing

According to the IRS, the key to determining whether or not a portion of a settlement is taxable is to examine what each amount replaced.

What if My Settlement Check Wasn’t Itemized?

In some cases, the insurance payout may be a lump sum check that does not categorize each amount separately. In that case, it can become challenging to figure out exactly what amount, if any, is taxable. A tax professional and your personal injury attorney can help to determine the tax status of all portions of your settlement. An experienced personal injury attorney can also help structure your settlement in a way that minimizes the tax implications and maximizes your compensation.