In honor of April 15th tax day, I wanted to address a common question we get from clients “Are there taxes on personal injury settlements?” Generally the answer is NO you do not have to pay taxes on your personal injury settlement (or verdict) award. It does not matter if the money was obtained by a pre-trial settlement, or if the personal injury case went to trial and you were awarded compensation by a verdict. On the State tax level, in both Pennsylvania and New Jersey, personal injury settlements are generally tax-free for the client. However, as most things in life, there are exceptions to the general rule as discussed below.
Under the Federal Tax Code, and according to the IRS, money received for the following are generally Tax-Free:
- Physical Injury – money obtained to compensate you for broken bones, surgeries, herniation’s, etc.
- Emotional Distress – money obtained for such things as mental distress, and/or mental anguish
- Medical Expenses – unless you a deduction for that money on your previous years income tax return
- Lost Wages – interestingly enough, even though you would have been taxed had you worked for the money, this recovery is tax-free, however, this changes in suits for employment-related lawsuits
Types of Personal Injury Awards that ARE Taxable:
- Legal Injuries – these are personal injuries that arise from harassment, discrimination, libel etc, not physical personal injuries
- Punitive Damages – these awards are rare, usually in the realm of products liability, and are meant to punish the wrongdoer through monetary penalty. One exception to the punitive award being taxed is a special case of wrongful death, where the State law only will allow for this type of damage.
Importance of Taxes in Your Personal Injury Case
Understanding the tax implications on your personal injury settlement is important because it can help guide you in whether or not you should accept an offer and determine the real cash value of your personal injury case. As a Top Personal Injury Law Firm we always try to give our injury clients the big picture view of their case. Weighing the risk/reward, and explaining all the factors including tax (or lack thereof) for all our personal injury clients, helps us in determining the best course of action for your case, and obtain maximum dollars for your injury. An important point to remember, we are personal injury lawyers and not tax professionals; there are exceptions to the general tax rules as noted above (and other more intricate tax points not discussed in this blog post), and we always suggest consulting with a tax professional about your personal injury settlement money before filing your taxes.
Resources: Taxes and Personal Injury Settlement
- IRS Publication 4345 – Settlement Taxiblity
- IRS Publication 525 – Taxable and Nontaxable Income for 2014