Personal injury lawyers are often asked whether a settlement is taxable. The simple answer to this is generally no. However, there are some notable exceptions. To be sure you are complying with all tax rules that apply to you, you should consult with an accountant and/or tax lawyer.
Physical Injuries or Illnesses
Settlements received for physical injuries or illnesses are typically not taxable under state or federal law. This includes wage loss, pain and suffering directly linked to those injuries or illnesses.
Punitive Damages
Punitive Damages are money owed by a defendant in a civil suit. Similar to a fine or legal punishment, punitive damages are not awarded as direct compensation for physical injuries. For this reason, these settlements are considered taxable.
Interest on Settlement
Some settlements will include pre- or post-judgment interest. While the settlement itself may not be taxable, the interest received on a settlement (if any) can be. Most personal injury settlements do not include interest payments, but they can.
Every settlement is unique. It is important to consult a qualified tax professional with questions specific to taxation and your settlement. If you or someone you know has been injured in an accident, contact Doar, Drill & Skow for a free personal injury consultation today.