Do I Have to Pay Taxes On My Personal Injury Settlement?

In most states you can recover damages in a personal injury case for pain and suffering, loss of enjoyment of life, physical impairment, scarring, loss of consortium, past and future medical expenses and lost income. Damages for past and future medical expenses and lost income are called special damages, and they can be calculated to an exact amount. Damages for pain and suffering, loss of enjoyment of life, physical impairment, scarring and loss of consortium are called general damages, and they are not subject to an exact calculation.

General Damages and Taxes

General damages are not subject to taxation. This is regardless of the amount awarded by the jury or agreed to in a settlement. The reason for this is that these damages are meant to compensate the person for what has been taken from them and what the person will have to deal with in the future due to the injuries he or she suffered. The damages are meant, in a sense, to balance the scales of justice. Because the scales are balanced there is no “income” to be taxed.

Medical Special Damages and Taxes

Medical special damages are not subject to taxation either. This is again regardless of the amount awarded by the jury or agreed to in a settlement. The reason for this is because the damages are designed to compensate the injured person for their out-of-pocket medical expenses in the past and to provide payment for future medical expenses that have not yet been incurred. Once again, the scales of justice have essentially been balanced when the injured person is compensated for his or her past and future medical expenses.

Lost Income Special Damages and Taxes

Damages for lost income are subject to income taxes. All damages for lost income are subject to income tax. This is because these damages are designed to compensate the injured person for the income that he or she could not earn while injured. The money for lost income is taxed because the injured person would be subject to being taxed if he or she had been able to work.

Lost Income Taxes and Settlements

Lost income damages do not usually make up the majority of damages are not typically itemized when a case settles, so the settlement is not typically subject to income tax. Also, the injured person must pay their attorney’s fees and case cost out of the settlement, so the full amount of the settlement is reduced from its face value. An experienced injury attorney can make sure your settlement is drafted to insure you will not have any income tax liability. In rare cases where an injured person has significantly more damages from lost income than from anything else, it may be necessary to recognize a portion of the settlement as lost income and the insurance company may issue a separate check to indicate such. This should only be done with the assistance of an accountant and an experienced personal injury attorney.