IS PERSONAL INJURY SETTLEMENT TAXABLE?
In many cases, the answer to this question is no – a personal injury settlement is not taxable. IRS Code § 104 excludes from gross income money received in compensation for Personal Injury and Sickness. The intent of the code is that damages received from an injury are a replacement of a loss. Therefore, they are not a taxable gain to the taxpayer.
Likewise, IRS Publication 525 provides in part: Other compensation. Many other amounts you receive as compensation for sickness or injury are not taxable. This includes compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments.
In other words, when you are injured in an accident and experience pain and suffering, scarring, permanent disability, etc., any compensation you get for that is tax free.An injury settlement does not put you ahead of the game. Rather, it is a way of trying to put you back to where you were before the accident. The same would be true, for example, if your car was damaged in a crash – the money you get for repair or replacement if not taxable.
However, there are some important exceptions to this general rule.For example, punitive damages and most emotional distress claims are not tax-free.Likewise, any payment you receive for a non-disclosure agreement is taxable. Also, reimbursement of lost wages is often taxable. Therefore, our accident injury lawyers always carefully negotiate the terms of the settlement agreement. Wherever possible, we want the settlement to be not taxable income to our clients.
PERSONAL INJURY LAWYERS WHO CARE
The above information is a very generalized and a basic answer to the question of whether a personal injury settlement is taxable.Every case is different and requires individual analysis to know for sure.Our MN personal injury lawyers focus on obtaining the best possible settlement for our clients who have been injured in an accident.We are not tax specialists. If you are involved in a personal injury case, consult your personal injury lawyer and an accountant before finalizing the settlement.In some cases, our lawyers refer clients to an accountant or financial planner. Make sure you understand the tax issues for your specific situation.