Upward of 90 percent of personal injury cases are settled before they ever make it to trial. Even when a case does make it to trial, quite often both sides reach a settlement before a jury can issue a verdict. So, once you accept a settlement offer, what happens next? Are personal injury settlements or verdicts taxed like regular income and lottery winnings?
If you end up filing a personal injury claim and receiving a settlement or a verdict, we have good news for you: For the most part, personal injury claims are not taxable under state or federal law. It doesn’t matter if you accept a settlement or if your case is settled at trial. In the case of most personal injury claims, Uncle Sam cannot touch them.
Are There Any Exceptions?
While the vast majority of personal injury claims are not taxable, there are four exceptions to the rule. For one, if you file a claim for physical injuries or sickness based on breach of contract, you will be taxed on those damages.
Second, punitive damages are taxable. So, if your personal injury claim includes punitive damages, which are meant to punish someone for their wrongdoing or their gross negligence, the punitive damages portion of your settlement or verdict would be taxable. If you do seek punitive damages, make sure your attorney asks the judge or jury to separate your verdict into punitive and compensatory damages so you aren’t taxed on both.
The third situation where a personal injury award is taxable is where a judgment incurs interest. If you receive interest on the judgment because it takes some time for you to get paid, then the interest would be taxable. Lastly, settlements or verdicts that are for emotional distress only (no physical injuries) are taxable unless the plaintiff can prove that he or she suffered any degree of physical injury, even the slightest amount.
If you need to file a personal injury claim, we would be happy to answer all of your tax-related questions. Contact our firm to get started.