A personal injury settlement is a legal agreement reached between a person who has suffered harm or injury (the plaintiff) and the party responsible for causing that harm (the defendant). Personal injury settlements are typically reached outside of court through negotiation and compromise, although they can also be the result of a court decision or a jury verdict. Personal injury lawyers work hard to negotiate a full and fair settlement for their clients – pushing back against insurance industry tactics. However, one question people have is if personal injury settlements taxable?
These settlements are a way to resolve legal claims without going through a full trial, which can be time-consuming, expensive, and uncertain. Personal injury settlements are common in cases where someone has been injured due to the negligence, recklessness, or intentional actions of another party. The goal of a personal injury settlement is to provide compensation to the injured party for their losses and damages. The question is: are personal injury settlements taxable?
Are Personal Injury Settlements Taxable?
Taxes are a part of life but there are certain types of income that aren’t taxable. In general, personal injury settlements are not considered taxable income at the federal level in the United States. This means that if you receive a settlement as compensation for physical injuries or illnesses, you typically do not need to report the settlement as income on your federal tax return. In addition, no taxes are generally owed for money received in settlement of a personal injury claim in Washington State either because compensation for an injury is not considered income for tax purposes.
While personal injury settlements are not generally considered taxable income, there are certain circumstances where a portion of a personal injury settlement might be considered taxable:
- Interest. If your settlement includes interest, that interest portion may be subject to taxation.
- Emotional distress. If you’re receiving a settlement for emotional distress without any accompanying physical injury or illness, the IRS might consider that portion of the settlement as taxable income.
- Medical expenses deduction. If you previously deducted medical expenses related to the injury on your tax returns, you might need to include a portion of the settlement that reimburses those expenses as taxable income.
- Structured settlements. If your settlement is structured with payments over time, the tax implications can vary depending on how the settlement is structured. Generally, the portion of each payment that represents compensation for physical injuries would be non-taxable, while any interest earned on the settlement might be taxable.
- Punitive damages. If a portion of your settlement is designated as punitive damages, it could be taxable. Punitive damages are intended to punish the defendant for particularly egregious behavior and are generally taxable as income.
It’s always a good idea to consult with a tax professional or attorney who specializes in personal injury cases to get accurate and up-to-date advice based on your specific situation and location.
Seek the help of a personal injury lawyer
If you or a loved one was injured because of the negligence of another, contact a personal injury lawyer to discuss your legal rights. Let an experienced accident attorney fight for the full compensation that you deserve. It is not uncommon to receive a settlement from the insurance company that is five to ten times larger with the help of a lawyer. Call the personal injury lawyers at Tario & Associates, P.S. in Bellingham, WA today for a FREE consultation! We have been representing residents of Whatcom County, Skagit County, Island County and Snohomish County since 1979. You will pay nothing up front and no attorney fees at all unless we recover damages for you!
