Personal Injury Settlement: How it May Affect Taxes

Personal Injury Settlement: How it May Affect Taxes

After experiencing a significant accident, an attorney may advise you to file a personal injury suit. In some cases, you may be awarded compensation to account for damages incurred as a result of the injury. Although, it should be noted that these awards may affect your taxes. The type and extent of the tax will depend on the amount awarded, as well as the damages the award was meant to compensate for. The federal government provides guidelines as to what awards may be taxed and the extent they may be taxed. Some may find these laws and regulations difficult to interpret. A tax and estate lawyer may be able to provide assistance when reviewing how your settlement may be taxed.

Punitive Damages

If an accident was caused due to extreme negligence or with willful intent, then it is likely that punitive damages are compensated for in the personal injury settlement. Punitive damages exceed the general compensation and are awarded to the victim as punishment to the defendant. Because these damages are not specific to the injury, suffering or loss of the victim, they are often considered as income, and thus, taxable by the IRS. Depending on the amount of the award, taxes to be owed for punitive damage will vary.

Compensatory Damages

Compensatory damages in a personal injury settlement are in place to reimburse for any losses sustained from the injury. These damages often include medical costs, lost wages and other financial expenses caused by the accident. Whether a compensatory damage is taxable or not depends largely on the type of damage and how it is treated. Generally, any reimbursements exceeding the damage value or considered income are likely to be taxed.

  • If an itemized deduction for medical and injury related damages was taken, then they may be taxable. If deductions were not taken, then taxes are not required for these damages.
  • Compensation for property damages or loss-in-value of property that is equal to or less than the damages will not be taxable. If the compensation exceeds the damages or the value of the property, then the difference is then considered income and will, therefore, be taxable.
  • If any compensatory damages received in the award are for lost wages from the injury, then that portion of the award is likely taxable. Damages for lost wages are intended to compensate a victim for any loss of income as a result of the injury. Compensation for wage loss damages are then considered income, so will be taxed accordingly.

Due to the relatively complex nature of federal tax laws, an individual may require assistance. Contact an estate attorney and schedule a consultation. The attorney may be able to clarify what taxes your settlement is subject to and how to go about paying them. Hiring an attorney, like an estate lawyer Sacramento trusts, may save you from fees and fines should you fail to accurately pay your settlement taxes.


Thanks to our friends and contributors from Yee Law Group for their insight into estate planning and taxes.


Greenberg Law Offices