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Do I have to pay tax on a personal injury settlement?

On Behalf of | Jan 28, 2015 | Personal Injury

Most personal injury cases don’t go to trial. That means that in most cases, the injured party receives a settlement, or payout, from the party that they believe caused them harm. This money is paid out to compensate the injured for medical bills, hospital stays, lost wages, and other hard costs of their injury.

So when you finally get your settlement, can you go ahead and start paying the bills, or do you need to save some back for taxes?

The answer depends on what kind of settlement you receive. Under the law, compensation for physical injury cannot be taxed. That’s because when you are injured as the result of someone else’s actions, the compensation is intended to offset the money you had to pay as a result of the injury-it’s not free money or a reward.

That said, settlements that aren’t compensation are taxable. Punitive damages, for example, are not intended to compensate you, but punish the wrongdoer. These are taxable. Also, any interest you receive on your judgment is taxable. Settlements for claims of emotional injury or distress are also taxable. Tax-exempt status is only for compensatory settlements resulting from physical injury or sickness.

If you are settling a case that has elements of compensatory damages and other, taxable damages, it’s important to include in the settlement which amount goes with which claim. This way you have proof of which settlement owes taxes when the time comes. This is especially important if the compensatory settlement is much larger than the taxable one.

At Bouchillon, Crossan & Colburn, L.C., our attorneys have more than 35 years dedicated to giving clients the attention, advice, support and empowerment they need to effectively meet their goals. We are committed to the principle that all persons shall have equal justice under the law. If you or a loved one has been injured and is seeking a qualified personal injury attorney, contact our Huntington, West Virginia office to speak with an attorney about your case, or call 304-521-4636.