Are Personal Injury Award Settlements Taxable?

If you or a loved one have been injured due to an accident or incident caused by someone else’s negligence or reckless behavior, you may be entitled to compensation. Whether you are filing a worker’s compensation claim, a medical malpractice lawsuit, or were the victim of a California car accident, a personal injury lawyer will work to get you the money you are owed, either through a settlement or through court action on your personal injury claim.

At Samer Habbas & Associates, our clients often ask us if the monetary settlement or judgment they collect in a personal injury case is taxable income.

Is My Accident Settlement Taxable?

The answer is that it depends. Personal injury settlements can be taxable, non-taxable, or partially taxable based on several factors, including how you were damaged, how your claim is resolved, and even how the checks and IRS forms are issued. 

The Internal Revenue Service (IRS) has set broad guidelines dealing with the taxability of personal injury settlements. Below are some important factors that California personal injury victims should be aware of regarding the taxability of settlements and verdicts.

Most personal injury awards and settlements are free from taxation. That means that, except in certain cases, you won’t need to pay taxes on the monetary compensation you receive as you would if it were regular income. Furthermore, even in cases where the IRS considers your award taxable, the  State of California will not impose additional taxes.

Non-Taxable Settlements

Under current law, settlements or verdicts for physical or emotional injuries are generally non-taxable. For example, if you were involved in a car accident, incurred $25,000 in medical expenses, and were reimbursed $25,000 in a settlement, that award would be non-taxable. Therefore, you would not need to report it as income on your tax return.

However, there are certain exceptions to this rule. For example, the settlement would be taxable if you deducted the same $25,000 medical expenses on a previous tax return.

Personal injury and accident claim settlements that include monetary awards based partially on emotional distress or mental anguish are also generally tax-free.

Taxable Settlements

There are certain types and portions of settlements and court verdicts in California personal injury claims that may be subject to taxation, including the following:

• Interest: any interest earned on a settlement or award will be subject to taxation while the original settlement amount is not. For example, if you were awarded $100,000 in compensation and earned $5,000 in interest on that award throughout the year, you would be taxed on the interest amount.
• Certain types of emotional distress or mental anguish compensation: If no correlation can be established between the emotional distress/mental anguish and the physical injury you suffered, but an award is given, that portion of the personal injury settlement amount will be subject to tax.
• Punitive damages: Punitive damages, which go beyond ordinary compensation for your personal injuries, are intended to punish the negligent party in the case. Punitive monetary awards are generally taxable.
• Loss of income or loss of earning capacity: A settlement or jury award that includes compensation for loss of income or loss of earning capacity is always taxable. You must report the award as income on your tax return.

A Tax Professional Can Help

Only a professional tax expert can give you a fully accurate picture of what taxes you can expect to pay or not pay after receiving a monetary award in a California personal injury claim. Personal injury victims who receive financial compensation from their claim must seek the assistance of a tax professional, particularly around tax time, to ensure that they follow all of the complicated IRS rules. Failure to do so can result in tax penalties and exorbitant fees.

Contact a California Personal Injury Attorney for the Best Possible Outcome in Your Case

If you or a loved one has been injured in an accident caused by someone else’s negligence, you may be entitled to compensation. However, you should never file a California accident claim, medical malpractice claim, worker’s comp claim, or any other personal injury claim on your own. Discussing your legal options with an experienced accident attorney is always the best course of action.

The skillful attorneys at the Law Offices of Samer Habbas & Associates specialize in all types of personal injury accidents, including slips and falls, car accidents, and medical malpractice. Our professional legal team knows how to fight for your rights and help you get the financial compensation you deserve. We attain results that exceed expectations.

For more information or to schedule a complimentary consultation with one of the attorneys, please call 888-848-5084.