Sep 06 2019

Tax Ramifications for Personal Injury Settlements or Judgments

While they’re never anyone’s favorite subject, taxes for a variety of income forms are always areas we have to consider. And while you may not have thought so previously, a monetary sum you receive as a result of a settlement or judgment based on a personal injury case may count as income that requires taxation.

At the offices of William Rawlings & Associates, we have a personal injury lawyer ready for you regardless of your claim type, whether it’s an auto accident, dog bite claim or any other kind of personal injury issue. We’re also happy to go over the details of any tax-related areas for you, areas that have changed significantly since new tax reform laws were passed back in 2017. While the answer to any of your tax questions may depend on individual circumstance, here are some general guidelines in terms of which settlement or judgement funds are taxable and which might be tax-free.

tax personal injury settlements judgments

Claim Origin

For starters, the primary determinant of whether your settlement or judgement will be taxed as income is the origin of the claim in question. Is the claim being made to recovery compensation based on areas like lost wages, emotional distress or related themes? In these cases, the money received will generally be taxable. However, as we’ll get into in subsequent sections, there are other recovery types that may not be taxed.

Pre-Settlement Agreement

If a settlement is being worked on by the plaintiff and defendant of any personal injury case, tax areas should be discussed in detail before completing the settlement. While any agreements made here technically aren’t binding by the IRS, they cannot be disputed if they are properly agreed upon in writing by both parties.

Physical Injuries or Sickness

Before the year 1996, when laws were changed, taxes were very different when it came to personal injury cases: They generally did not apply for any kind of personal injury damages, even emotional distress, defamation or similar areas.

Since then, laws have restricted non-taxed damages to specifically physical areas only. If you are physically injured or become sick as a result of the incident in question, funds recovered under this portion of liability generally will not be taxed.

Punitive Damages and Interest

If you are paid punitive damages on top of compensatory areas, or if your settlement includes interest in any way, these fund types are virtually always taxed.

Attorney’s Fees

Finally, while we wish it were not the case, the law says that all money you receive for lost wages and emotional distress must be taxed – including any portions you divert to attorney’s fees. If the funds you’re recovering are physical in nature and therefore not taxable, however, you generally won’t have to worry about tax on attorney’s fees either.

For more on the tax ramifications associated with personal injury cases, or to learn about any of our auto accident or personal injury service, speak to the staff at the offices of William Rawlings & Associates today.