Do I Have to Pay Taxes on My Personal Injury Settlement or Award?
Are Baltimore Personal Injury Settlements or Verdicts Taxable Under Federal Law?
Whether a personal injury award is taxable under federal law depends on the nature of the damages awarded. Do I Have to Pay Taxes on My Personal Injury Settlement or Award? Yes and No. The Internal Revenue Service (IRS) makes a key distinction between compensation for physical injuries or physical sickness, and compensation for other types of harm, such as emotional distress or punitive damages.
General Rule: Non-Taxable for Physical Injuries
The Internal Revenue Code is commonly interpreted as stating damages received on account of personal physical injuries or physical sickness are not included in gross income. Do I Have to Pay Taxes on My Personal Injury Settlement or Award? As a general rule, if someone receives a settlement or judgment to compensate them for bodily harm — such as a broken bone, traumatic brain injury, or internal injuries — that portion of the award is not taxable.
This is commonly understood to include:
- Compensation for pain and suffering resulting from physical injuries
- Reimbursement for past and future medical expenses
- Lost wages if the wage loss is attributable to time missed due to the physical injury or illness
The rationale here is that these amounts are excluded from federal income tax because they are considered compensation for a loss, not a gain.
Important Exceptions: What Can Be Taxable
However, it is also commonly accepted that not all portions of a personal injury award are tax-free. The following categories may be taxable under federal law:
- Punitive Damages
- Punitive damages, which are awarded to punish the defendant rather than compensate the victim, may well be taxable, even if they arise from a physical injury claim.
- Interest on the Judgment
- If a court award includes interest (such as post-judgment interest), that interest can be taxable income, even if the underlying damages are not.
- Medical Expenses Previously Deducted
- If the plaintiff previously took a tax deduction for medical expenses related to the injury, and then recovers those amounts later in a lawsuit, the reimbursed portion must be reported as income under the IRS’s tax benefit rule. If it seems like this is getting complex it is.
Baltimore Personal Injury Settlements: Structuring Matters
In settlements, the parties often allocate damages into different categories. While the IRS is not bound by these allocations, courts can give weight to a clear and reasonable breakdown of the settlement into taxable and non-taxable components. To reduce tax exposure, plaintiffs and their attorneys often work to structure the settlement carefully, distinguishing between compensation for physical injuries and other types of damages.
“You just got your personal injury award check. Do you get to keep all of it?”
Without rendering any opinions, I can point the interested reader to the IRS publication.
- “Personal physical injuries or physical sickness. If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable”
- “If you receive a settlement for personal physical injuries or physical sickness, you must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit.”\
- “Emotional distress or mental anguish • The proceeds you receive for emotional distress or mental anguish originating from a personal physical injury or physical sickness are treated the same as proceeds received for Personal physical injuries or physical sickness above. If the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, you must include them in your income.”
Disclaimer: No Tax Advice Provided
This is the most important advice on the page. The information contained in this article is provided for general informational purposes only and should not be construed as legal, financial, or tax advice. Although this content discusses the potential tax implications of personal injury settlements or verdicts under federal law, it is not intended to provide, and should not be relied upon for, tax advice. It is intended to raise potential flags for the careful client. The Internal Revenue Code and applicable tax regulations are complex and subject to change, and the tax treatment of any recovery may vary based on individual circumstances, including the specific facts of the case and prior tax filings. You should not act or refrain from acting based on any information provided herein without first seeking the advice of a qualified tax professional. I not prepare tax returns or offer tax preparation services, and no attorney-client relationship is formed with respect to tax matters by reading or relying on this content. If you have questions about how a Baltimore personal injury recovery may affect your federal or state tax obligations, you are strongly encouraged to consult a licensed accountant, tax attorney, or enrolled agent for personalized guidance.
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. In fact, I extend a complimentary case evaluation and strategy planning session to all new clients. 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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For over three decades, I have battled against the nation’s largest insurance companies, always endeavoring to ensure my clients receive the compensation they deserve. As lead counsel in thousands of cases across Maryland, New York, and Florida, I have recovered millions for clients whose claims were wrongfully denied and delayed. Whether denying fair compensation for a personal injury victim or denying benefits to a homeowner, Insurance companies employ policy exclusions, technicalities, and lowball offers to deny and defeat claims. They also hire very good lawyers to fight you in court. So should you. When an insurance company unfairly rejects a claim, I stop them.
