If you’ve received a personal injury settlement in Wisconsin, one of the first questions that may come to mind is: Do I have to pay taxes on it? The good news is that in most cases, compensation for personal injuries is not taxable—but there are important exceptions you should know about.
Compensation for Physical Injuries or Illness
The IRS generally excludes from taxable income any money that is meant to compensate for physical injuries or physical sickness. That means if your settlement covers:
- Medical expenses (hospital bills, therapy, medications, future care)
- Pain and suffering tied directly to your physical injury
…then you typically do not have to pay federal or Wisconsin state income taxes on that portion of your settlement.
When Taxes May Apply
However, there are certain parts of a settlement that may be taxable, depending on what the payment is for:
- Punitive Damages
- Punitive damages are awarded not to compensate you, but to punish the wrongdoer for especially reckless or egregious conduct.
- Because they are not tied to your injury-related losses, the IRS will likely tax punitive damages.
- Wisconsin juries sometimes award punitive damages in cases of drunk driving, intentional misconduct, or extreme negligence—so it’s important to be aware of the tax implications.
- Interest on Your Settlement
- If your settlement includes interest because payment was delayed, that interest portion may be considered taxable income.
- Other exceptions
- Tax law is complicated! There are many nuances. You should speak to a tax lawyer or accountant to inquire whether your specific personal injury settlement is taxable.
Final Thoughts
Most Wisconsin personal injury settlements for physical injuries are not taxable, which allows injured victims to use their compensation to rebuild their lives without an added tax burden. But punitive damages, interest, and other exceptions can trigger taxes.
If you’re negotiating a settlement or preparing to receive one, it’s a good idea to:
- Work with an experienced personal injury attorney to ensure your settlement is structured properly.
- Consult a tax professional to clarify which portions, if any, must be reported as income. That way, you won’t be caught off guard when tax season rolls around.