Filing taxes can be complicated as it is, but when you fold in a personal injury settlement, it adds a few more questions to the mix. For starters, many people wonder, “Do you have to pay taxes on injury settlements?”
The honest answer to that question is that it depends.
Personal injury settlements cover a range of damages and the IRS views each a little differently. Some are taxed and some aren’t. That’s one of the reasons why it is important to work with an Arizona personal injury lawyer, like the professionals at Torgenson Law, who ensure that each personal injury settlement payout is classified correctly for tax purposes.
The best way to explain the taxable differences between each type of settlement is to go through each of the most common types. We’ll start with compensatory damages, which are generally paid to make a victim “whole” again following an unlawful or negligent act. Think of compensatory damages as a reimbursement for what was lost in an incident.
For these types of settlements, covering physical injuries and illness, the IRS usually does not consider them taxable. Compensatory damages paid as a settlement generally aren’t taxed because they usually aren’t reported as income. However, there are exceptions, such as when medical expenses related to the injury were previously deducted by the victim, so be sure to consult with a tax professional for guidance related to your specific situation.
If someone receives a settlement for lost wages or employment-related compensation, that generally is taxable. The IRS views this type of settlement as earned income, since it is replacing lost wages, which means it could also be subject to payroll taxes.
Whether personal injury settlements for emotional distress or mental anguish are taxable is a bit more complex. If an emotional distress settlement is tied to the physical injury or illness the victim has experienced, the compensation from that settlement is generally not viewed as taxable income. Under any other circumstance, emotional distress and mental anguish settlements are usually taxable.
Specifically, emotional distress claims linked to employment disputes or non-physical harm are generally viewed as taxable.
Given the complexity of IRS rules and personal injury settlements, it’s often helpful to work with a personal injury attorney during a claim and consult with a tax professional once a personal injury settlement payout is received.
When working with an attorney, there are additional layers of tax circumstances that need to be considered. Generally speaking, if a settlement is non-taxable, such as compensatory damages, attorney fees typically don’t create additional tax obligations. The opposite is true, too. If a settlement involves taxable elements, like those that cover lost wages, then attorney fees may require additional reporting.
Personal injury settlement taxes can be complicated, especially if they aren’t classified correctly from the start. At Torgenson Law, we often hear clients ask, “Are personal injury settlements taxable?” As experienced, trusted personal injury attorneys, we make sure we offer transparent guidance on the tax implications of a personal injury settlement payout so our clients aren’t caught off guard when tax season rolls around.
No one should navigate personal injury cases alone. The team at Torgenson Law is here to support you through this process, ensuring your best interests are represented and your tax questions are answered. If you or a loved one have been injured, reach out to our team today.
No pressure, no upfront costs, just answers from a legal team that takes your recovery personally.
John Torgenson is a highly experienced personal injury lawyer with over 20 years of practice in Arizona. He earned his Bachelor’s degree from the University of Utah and his Juris Doctor from Notre Dame. John has a proven track record of securing substantial verdicts and settlements, including an $8.25 million recovery for a gunshot injury victim. His expertise has earned him AVVO ratings and recognition as a Super Lawyer.
John is also a sought-after lecturer on personal injury law, sharing his extensive knowledge with peers and aspiring attorneys. Beyond his legal practice, John is an avid golfer and actively supports organizations like the Military Assistance Mission, Arizona School for the Arts, Page Balloon Regatta, University of Arizona Foundation, Junior Achievement of Arizona, and the Tim Huff Pro Bono Golf Classic.
Passionate about advocating for injury victims, John dedicates his career to battling insurance companies and corporate interests, ensuring that the rights of those who are hurt are vigorously defended.
