Are Personal Injury Settlements Classified as Income?

When you are staring at a pile of medical bills and unpaid expenses because you had to take time off work, it is easy to look forward to receiving your personal injury settlement check from the insurance company. However, once you go to cash the check, it is natural to wonder whether you will be liable for taxes on the payment. Our personal injury lawyers regularly hear the question: will my settlement be classified as income for tax purposes?

Fortunately, the answer is usually no – your personal injury settlement does not need to be reported as income on your tax returns. However, like so many questions in the legal field, there are exceptions to this rule, and a lawyer should review your specific situation.

Compensation for Your Physical Injuries

Uncle Sam generally cannot tax compensation you receive for physical injuries you sustained in an accident. This is the case whether you received payment without a lawsuit, settled out of court, or won an award at trial. Compensation for physical injuries can include payment to cover:

As long as your pain, suffering, and emotional distress stem from a physical injury or illness, you should not be taxed on those funds.

When You Might be Taxed

Sometimes, physical injuries or illnesses arise from a breach of contract. If you bring a legal claim based on breach of contract instead of negligence or another cause of action, the damages you receive from the contract claim can be classified as taxable income.

In addition, some injury victims receive punitive damages when the defendant’s behavior was particularly egregious. Punitive damages are intended to deter such conduct in the future and punish the defendant – not to compensate the victim for any specific losses or injuries. Because these damages are not compensation for a physical injury or illness, punitive damages are taxable.

Any personal injury victim knows that claims take time, especially if the matter has to go to court. While a lawsuit is pending, interest can start accruing on your settlement. If you filed a claim on February 15, 2018, and it settled on July 20, 2019, you can receive interest for the time the claim was pending. This interest is considered taxable income, however.

Finally, some legal claims do not involve physical injuries, but instead seek damages for the infliction of emotional distress, employment discrimination, and other wrongs. Settlements in such cases are taxable if you cannot show that you suffered any type of physical injury.

Contact our Nashville Personal Injury Lawyers for More Information

The personal injury attorneys at Bednarz Law in Nashville know that the legal process can be confusing. We are here to guide our clients every step of the way, answering any questions, and addressing concerns as we go. If you suffered injuries in an accident, call our Nashville office at 615-256-0100 or contact us online for free today.