Tax Guidelines for Injury Compensation and Settlements

If you were involved in a lawsuit this past year because you sued someone for an injury that you endured, you may have gotten a good amount of compensation as part of the settlement in or out of court with the help of lawyers like those at the Law Offices of Marc S. Albert.

But did you know that you will need to claim portions of this settlement money as additional income on your tax return? Continue reading to learn more so that you can properly file your taxes without missing any important pieces of information that the IRS is looking for.

Physical Injury

Generally, the money that you receive as a result of your personal injury claim is not taxable under state or federal law, provided a physical injury was incurred. You can’t be taxed on the verdict proceeds or the settlement, so you do not need to file this as taxable income.

Also, if you receive any money that is meant to compensate you for things like medical bills, pain and suffering, lost wages, emotional distress, attorney fees, or loss of consortium, you will not have to pay tax on these funds either. This is, of course, provided that the money is the result of a physical sickness or personal injury. So if your employer was negligent at work and you were exposed to something that made you sick, and if you filed a lawsuit and won, you would not have to pay taxes on the money you receive.

Punitive Damages

“Punitive damages” is a term that refers to a monetary award that you get in addition to compensation for your injuries. These damages are meant to punish the guilty party for what they did to cause your injuries.

If you sued because you were injured and you won the case and received what is referred to as punitive damages, you will need to pay taxes on that money.

Claims That Don’t Involve Physical Injuries

As mentioned above, if you file a claim and you win your lawsuit because you became ill or you suffered from physical injuries, you will not need to pay taxes on the money that you receive. However, if you were to file a lawsuit for emotional distress or for employee discrimination, as a couple of examples, and there was no kind of physical injury involved, the money that you receive if you win the case will be taxable. If there is a physical injury involved with the mental anguish or emotional distress, however, you can probably get out of having to pay any taxes on the settlement.

Other lawsuits that don’t involve physical injuries could include discrimination, wrongful termination, harassment, or invasion of privacy claims. Again, these settlements would be considered taxable because they don’t involve any kind of physical injuries.

The tax law can become pretty complicated when it comes to claiming money that you have received from a lawsuit that you won. Work with your lawyer if you have any questions regarding what you will need to claim as income.


James Daniels is a freelance writer, business enthusiast, a bit of a tech buff, and an overall geek. He is also an avid reader, who can while away hours reading and knowing about the latest gadgets and tech, whilst offering views and opinions on these topics.

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