Are Personal Injury Lawsuit Settlements Taxable?

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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 These Settlements Taxable?

Now, to the crux of the matter: are these settlements taxable? The answer is, it depends. According to the Internal Revenue Service (IRS), the taxability of these settlements is contingent upon the nature of the compensation.

  • Physical injuries or physical sickness. If you receive a settlement for physical injuries or physical sickness, it is generally not considered taxable income, provided you did not take an itemized deduction for medical expenses related to the injury or sickness in prior years that resulted in a tax benefit.
  • Emotional distress or mental anguish. The portion of your settlement that is for emotional distress or mental anguish is taxable, unless the emotional distress or mental anguish is directly linked to the physical injury or physical sickness.
  • Lost wages or lost profits. If your settlement represents compensation for lost wages or lost profits, it is typically taxable and should be reported as income.
  • Punitive damages. Punitive damages are generally considered taxable, regardless of whether they are related to a physical injury or physical sickness.

What Does This Mean For You?

So, here’s the deal: understanding the ins and outs of your settlement is absolutely crucial. It’s not enough to ask, “Are personal injury lawsuit settlements taxable?” You need to know what parts of your settlement are taxable and which are not.

Remember, every case is unique. Therefore, it’s always a good idea to speak to your personal injury attorney in order to understand the specific tax implications of your settlement.


The taxability of personal injury lawsuit settlements is not a straightforward “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 complex 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 these complex legal waters.

If you need financial assistance to help you get through your personal injury litigation, Baker Street Funding can help you. Our lawsuit funding solutions make it easier for individuals who are waiting for a settlement but need access to funds immediately.

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 and more. This 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. Apply for a lawsuit loan today.

At Baker Street Funding, we give you the inside scoop on pre-settlement funding by covering a variety of ... financing and legal topics to help you made the best financial decision for you and for your case. Our experts break down complex ideas in a way that's easy to understand so you can stay informed on current trends as well as tips and fact checked information by the CEO and founder, Daniel Digiaimo. Furthermore, Despite its name, consumer legal funding is not a loan. If you don't win your case, no payment needs to be made back. To avoid confusion and simplify matters on, we'll use the word "loan" throughout this article.

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