Are Personal Injury Settlements Taxable Income?

Are Personal Injury Settlements Taxable Income?

Most every personal injury case is settled outside of court via a mutual agreement between parties—this can create relatively easy, if risky, routes to secure fair compensation, but raises the question of whether or not these out-of-court settlements must be reported as taxable income. Before you sign off on a settlement agreement, you should know how that sudden income is going to affect your taxes at the end of the year. The answer is complex but put simply: A personal injury settlement has taxable and non-taxable components, and isn’t treated as a lump sum.

What Is and Isn’t Taxable

Before getting into complexities, suffice it to say that if your settlement involves nothing but your personal injury (or physical sickness), it’s entirely non-taxable. If you had a slip and fall accident with no damages but hospital fees, for example, then you don’t have to worry about taxes for it, period. However, most personal injury cases are more complex, involving a wide array of damages. The taxability of theses damages is explained in more detail in the IRS’s Settlement Taxability publication, but we’ll summarize it here.

Are Personal Injury Settlements Taxable Income?Let’s first look at damages which are unconditionally exempt from taxes as part of a personal injury settlement:

  • Medical bills, including for ongoing therapy or treatment
  • Physical pain and suffering damages
  • Emotional anguish and duress
  • Attorney’s and legal processing fees
  • Lost wages, both immediate and in the future
  • Loss of consortium

Any damages that aren’t clearly correlated to your personal injury may or may not be taxed, so talking to a personal injury attorney in Arizona is vital, just to be sure. However, other components of a personal injury settlement are completely taxable:

  • Punitive damages, which are damages specifically awarded to punish the guilty party for excessively unreasonable, criminal, or negligent behavior, rather than to compensate the claimant for any particular loss. 
  • If you were injured as a result of a breach of contract or received your settlement as part of an employment-related lawsuit, usually due to a workplace injury, the portion of your damages relating to those components becomes taxable income.
  • Interest for a settlement or judgment is often included in your compensation package, based on how long your case has been pending for. This interest, similarly to punitive damages, is not inherently related to your actual injury, and as such, is taxable.

Getting Personal Injury Compensation in Arizona

Knowing the taxable and untaxable components of a personal injury settlement are only valuable if you secure a fair settlement in the first place. Proving negligence in a personal injury claim is difficult on your own, but with the help of our experienced personal injury attorneys in Phoenix, it becomes a far more manageable affair. Legal professionals have a unique blend of experience, resources, and connections that make it far easier to secure comprehensive evidence and maximize a settlement offer, and can always be of service, even if you don’t choose to hire one. Give ELG a call today at (623) 877-3600 to schedule a free consultation with a compassionate lawyer who can take the burden of a case off your shoulders, all while clearing up any confusion you might still have in the aftermath. We can help,