Unless an exception exists, the general rule is that the proceeds received from most personal injury cases are exempt from both federal and state taxes. It is irrelevant for tax purposes whether you received a settlement pre-filing or after filing a complaint or obtained a judgment at trial. Neither the state or federal government can tax your settlement or verdict.
The Federal tax code excludes damages received as a result of personal physical injuries or physical sickness from a taxpayer’s gross income.
Therefore, personal injury damages intended to compensate the claimant for damages such as medical bills, lost wages, pain and suffering, emotional distress, loss of consortium, and attorney fees are not taxable as long as they come from a personal injury or a physical sickness.
The Exceptions to the General Rule
Unlike typical injuries intended to compensate the victim which are not subject to taxation, punitive damages are meant to punish the wrongdoer. An award of punitive damages is taxable and must be reported as “Other Income” on line 8z of Form 1040. Your personal injury lawyer will want to get an order from the court separating out the awards, in order to prove to the IRS that part of the verdict was compensatory, and thus, not taxable.
Emotional Injury Claims
As noted above, only injuries associated with a physical injury are non-taxable. Thus, suffering emotional distress without any physical injury is taxable. For example, you receive damages as a result of witnessing someone else’s injury. For this amount of the damages, you will have to pay taxes. However, the amount you must include is reduced by: (1) amounts paid for medical expenses attributable to emotional distress or mental anguish not previously deducted and (2) previously deducted medical expenses for such distress and anguish that did not provide a tax benefit.
Interest on any settlement is generally taxable as “Interest Income” and should be reported on line 2b of Form 1040.
Lost Wages in Employment Suit
You may have to pay federal taxes on any part of your settlement awarded for lost wages in an employment-related lawsuit because these are viewed as taxable wages.
Interest on a Settlement
If you receive interest on any settlement, this is also taxable as Interest Income on Form 1040.
If you have been injured, contact Timothy L. Miles, a nationally known, experienced, and knowledgeable personal injury attorney in Nashville for a no-risk, Free Case Evaluation.
Timothy L. Miles
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