Are personal injury settlements tax-free?

On Behalf of | Dec 5, 2022 | Personal Injury |

Did you know that many personal injury lawsuits never even make it to court? It is extremely common for the parties involved in personal injury lawsuits to decide to settle their dispute before it even gets to a judge. However, you must take tax considerations seriously before deciding to settle.

Depending on your circumstances, the settlement monies from a personal injury lawsuit may be non-taxable. According to the IRS, settlements for physical injuries, physical sickness, emotional distress or mental anguish are usually tax-free.

Tax-free settlement money

Typically, any monetary remedy that an offending party pays to you for either physical sickness or physical injuries is tax-free. Let’s assume that you have paid out $50,000 in medical expenses due to injury and you settle with the offending party for $50,000. In this case, you would not pay any taxes on that $50,000 remedy.

The exception to this is if you have deducted the $50,000 from your income taxes on a prior tax return. In this event, the settlement becomes taxable. Monetary remedies for mental anguish and distress work the same way, provided that the anguish and distress relate directly to the injury and you have not deducted expenses related to anguish or distress on prior tax returns. However, if these monies are not related directly to an injury but instead to injury to reputation, this money is taxable.

The value of working with an attorney

If you are thinking about settling your personal injury lawsuit, talking with an attorney first is helpful. This can help ensure that you do not fall afoul of taxes.

FindLaw Network