Personal Injury Case Proceeds and Taxes

When you are injured in an accident, it may seem as if you will never receive the compensation you deserve for your losses, damages, and injuries. Some personal injury cases take years to settle while other cases must go to trial to resolve the matter. Because there is constant haggling on both sides, and Plaintiffs and their attorneys are always trying to get the client the most money, it is important to let the process work itself out.

There are many factors outside of your attorney’s control such as statutory limits, what the insurance company offers, and the jury pool in a certain jurisdiction. Therefore, once your case is settled or a jury renders a verdict, you will want to know how much money you will receive and when you will receive your money.

The purpose of a personal injury settlement is to compensate you for your losses. This is often referred to as “making you whole.”  Because the law cannot undo your injuries, the only thing it can do is provide a legal means for you to receive compensation from the party who caused the accident that resulted in your injuries. The compensation is viewed as recouping losses sustained as a result of another person’s negligent acts. It would not make sense to tax a personal injury settlement because it is not a windfall, income, or earnings.

Therefore, most personal injury settlements are non-taxable. However, there are always exceptions to the rule. For instance, if you deduct medical expenses related to the injury on your tax returns and the deduction provided a tax benefit, that amount of your settlement will be subject to taxes. Also, compensation for lost wages and income in a personal injury settlement is taxable. Punitive damage awards are also taxable. 

Be sure to consult with a professional tax advisor if you have any questions.