Are Personal Injury Settlements Taxable?



Since tax time is near, I thought providing you with information on whether personal injury settlements are taxable was in order. After being in a car accident and having received a settlement, you may be wondering if you have to report that money to the IRS as “income”. The short answer is: NO (BUT, there are exceptions where do have to report the income). In a typical car accident claim, you will be awarded monies for bodily injury and related pain and suffering, that you may have sustained as a result of the accident. In this scenario, which usually happens in your standard car accident claim, you will not have to report your settlement as “income” to the IRS. However, there are some exceptions to this general rule. 


The first exception applies if you have taken itemized deductions for medical expenses in recent years on your tax return. If  your medical expenses have been so high in the past, that you itemized those bills on your tax return, you MUST report your personal injury settlement to the IRS. If this is the case, you should consult with a licensed tax professional, to make sure you are following all IRS regulations. 

Another exception to this rule is if you received money for lost income. Money received for lost of income, as part of a personal injury settlement, needs to be reported as income and is taxable. 

If your case went to trial and you were awarded interest on your personal injury settlement, then the interest you received is also considered income. You will have to report this “interest” to the IRS as income.

The final exception to the general “no reporting” rule, is if you received punitive damages as part of your injury award. The IRS is entitled to tax any punitive damages you may have received.
 
In most cases, you will not receive an award for punitive damages or interest. So as long as you don’t also get an award for lost income and have not taken a recent medical expense deduction on your tax return, your personal injury settlement is not considered taxable income for the IRS. If you have any doubt as to whether your settlement is taxable, you can always talk to your tax professional or your personal injury attorney. 

Next time, we will discuss the top five questions to ask, before hiring a personal injury lawyer.

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