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Are Personal Injury Settlements Taxable?

Posted on May 9, 2018 9:56am PDT

Since tax season just came to an end, taxes are still on a lot of people’s minds. If you are about to file a personal injury claim, at some point you’ll wonder, “Am I supposed to pay taxes on my personal injury settlement?” This is a valid question and it’s something that all plaintiffs need to put their attention on.

For starters, we’re saying “personal injury settlement” as opposed to “jury verdict” because the vast majority of personal injury claims settle out of court. However, even if your case were to go to trial and result in a favorable jury award, the advice would be the same in regards to your tax obligation.

Physical Injury Compensation is Not Taxable

We have good news – personal injury settlements and verdicts are not generally taxable under state or federal tax laws. So, whether a case settles in or out of court, it’s not typically subject to state or federal taxes. Meaning, neither the IRS or the State of New York are in the practice of taxing the proceeds from personal injury settlements and verdicts.

“Are there any exceptions to this rule?” Yes, there are exceptions but they apply to very few personal injury cases. First, if a breach of contract caused your physical injury or illness, you would be taxed on the damages if they stemmed from a breach of contract lawsuit.

The second exception includes punitive damages because these are taxable. If a claim includes punitive damages, the plaintiff’s personal injury lawyer will ask the judge or jury to separate the verdict into punitive and compensatory damages; this way the compensatory damages are not taxed by the IRS.

The third and final exception is claims for emotional injuries only, such as those arising from employment discrimination or something else that caused emotional distress, but no physical injury. If you filed a claim for emotional injury only, it would be taxable unless you can prove that you suffered even the slightest degree of physical injury.

Related: Why Most Personal Injury Claims Settle Out of Court

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