Do I Have to Pay Taxes on My Personal Injury Settlement or Award?

You just got your personal injury award check. Do you get to keep all of it?

An experienced Baltimore personal injury lawyer will advise you that the general rule is that physical injuries or physical sickness settlements are generally not  taxable [ e.g. those sustained in a Baltimore car accident]. But, the IRS in Publication 4345 (Rev. 6-2006) tells us the that it recognizes "that receiving a settlement award (amount) from a personal injury suit may create new tax issues for some individuals. The type of settlement you receive is determined by your Final Settlement Agreement.

Physical injuries or physical sickness settlements are generally non-taxable.

If you receive a settlement for physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to this injury in prior years, the full amount is non-taxable and generally does not need to be reported on your income tax return. But If you receive a settlement for physical injuries or physical sickness and did deduct medical expenses related to the injury, the tax benefit amount is taxable and should be reported as “Other Income” on line 21 of Form 1040."

Beware though. The IRS also tells us that "interest, punitive damages, emotional distress or mental anguish, and employment discrimination or injury to reputation settlements are generally taxable." [IRS in Publication 4345 (Rev. 6-2006)]. I have made it my habit and practice to fully advise my clients on every aspect of their personal injury claim to the best of my ability and experience. When it comes to tax law, however, I recognize the extent of my knowledge ends quickly. I  always suggest my client with tax and financial planning professionals to fully determine their  obligations and options.

 
 
 
 
 

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