Are Personal Injury Settlements Taxable?

When it comes to personal injury lawsuits, many people wonder, "Are personal injury settlements taxable?" It doesn't have to be difficult to ask because the answer is usually no. A personal injury settlement isn't based on a black-or-white definition. Multiple scenarios can create a situation where legal compensation is subject to tax or not.

Personal injury settlements are among the few legal actions exempt from taxes. Unlike most lawsuits, the winning party of a personal injury claim does not have to pay a portion of their compensation to the Internal Revenue Service (IRS). 

The reason why most personal injury settlements are not taxed is simple. This is because the tax system only requires payment on income gained, and a personal injury settlement is not considered a gain. Instead, it is seen as compensation for a loss.

Types of Non-Taxable Settlements

Typically, a settlement will be exempt from taxes for compensation related to physical injuries or sickness, defined as visible bodily harm. Some examples of cases where you can rest assured that they won't be taxed:

• Collisions involving automobile and property damage 

• Accidents resulting from property or building neglect 

• Workplace injuries

• Serious harm due to a side effect of defective medications

• Deaths caused by negligence

Exceptions Where Settlements Are Taxed

Unfortunately, every tax rule has exceptions, and there are some rare cases where the IRS may tax a personal injury settlement. Some of the factors that could make a settlement taxable are the following:

• Lost Wages - Any compensation received for lost wages is taxable. This compensation is meant to cover the money lost from missed work and is taxed the same way your regular income is.

• Punitive Damages - These are an additional sum ordered to be paid by the defendant, over and above compensatory damages, as a punishment for negligence. These damages, which are usually determined by a judge or jury and have no relation to injury costs, are always taxable.

Get in Touch with a Personal Injury Lawyer 

Law Offices of Jeff Martin has the most experienced and respected personal injury attorneys in Tulsa, Oklahoma. If you need help getting financial compensation for your personal injury, don't hesitate to schedule an appointment with us as soon as possible. Visit our law firm in Tulsa, Oklahoma, today!