Are you in the midst of a personal injury lawsuit? Have you recently received a settlement and are now wondering, “Are personal injury lawsuit settlements taxable?” You’re not alone in this. Many personal injury victims find themselves asking this very question.
Understanding the tax implications of a personal injury lawsuit settlement can be complex, but don’t worry—we’re here to help you understand how this process works. Let’s dive in!
What Are Personal Injury Lawsuit Settlements?
Firstly, let’s define what we’re talking about. Personal injury lawsuit settlements are compensations awarded to individuals who have suffered harm due to another party’s negligence or intentional conduct. These settlements can cover a variety of damages, such as:
- Medical expenses;
- Lost wages;
- Pain and suffering; and
- Emotional distress.
Additionally, a personal injury settlement is often settled out of court. That means before a lawsuit goes to trial. Both parties, usually with their lawyers, discuss the case’s facts, the injury severity, the degree of the defendant’s fault, and the amount of money you should receive. The negotiations can be a one-time meeting or a series of discussions.
If both parties agree to a settlement amount, the case doesn’t proceed to trial. That means you will receive compensation, and in return, you must agree not to pursue any further legal action regarding the incident.
Are Personal Injury Settlements Taxable?
The answer is, it depends. According to the Internal Revenue Service (IRS), the taxability of personal injury settlements is contingent upon the nature of the compensation.
- Physical Injuries or Physical Sickness: Settlements for physical injuries or sickness are generally not taxable, unless you previously deducted medical expenses related to these injuries on your tax return and received a tax benefit from those deductions (IRS.gov) (Injury Claim Coach).
- Emotional Distress or Mental Anguish: This portion of your settlement is taxable if it isn’t directly related to a physical injury or sickness. If the emotional distress originates from a physical injury, then it is treated similarly to the settlement for the physical injury itself—generally non-taxable (www.alllaw.com) (Steinger, Greene & Feiner).
- Lost Wages or Lost Profits: Compensation for lost wages or profits due to injury is typically taxable since it is considered a replacement for income that would have been earned and thus subject to ordinary income taxes (Ritchie Law).
- Punitive Damages: These are generally taxable, regardless of the nature of the underlying injury. Punitive damages are awarded to punish the defendant rather than to compensate the plaintiff for loss or injury, and thus they are included in taxable income.
The Takeaway
The taxability of personal injury lawsuit settlements is not a simple “yes” or “no.” The compensation you receive will ultimately depend on the specifics of your case.
We hope this guide has shed some light on this complicated issue, and when in doubt, always talk to your personal injury attorney. Your peace of mind and financial health are worth it.
Stay informed, stay confident, and remember, Baker Street Funding is here to help you explore funding opportunities if you need an advance on your settlement. Some of the types of cases we fund include medical malpractice, slip and fall, bus accidents, truck accidents, fatal work accidents, wrongful death, nursing home negligence, settlements, and more. Pre-settlement funding can be particularly helpful in managing your financial obligations while you recover from your injuries.
Experience the reassurance of getting the financial support you need when you need it most by calling (888) 711-3599.
Apply for a lawsuit loan today.
