DO I PAY TAXES ON PERSONAL INJURY SETTLEMENTS?
Feb. 24, 2022
In our practice, our clients come to us most often when they have reached the end of their rope with the stress and anxiety of dealing with a severe injury. Often, they have lots of questions about how their medical bills will be paid and how they will recover financially from the lost time at work, not to mention the emotional trauma of dealing with a serious injury.
Thankfully, most of our clients’ cases are settled before a trial, saving everyone time and money. (Trust us. You don’t want to go to trial.) Many families are indeed one crisis away from financial tragedy, so when a massive event like an injury-causing crash occurs, it can be devastating. Once a settlement is reached, claimants wonder, “What happens now?”
Ideally, you’d get your settlement quickly, pay your amazing legal team, and be on your way to pay your medical bills or whatever you need to do to move past the traumatic event that brought you to our door. In short, you’d be getting back to your real life. As we head into tax filing season, some clients may be wondering whether Uncle Sam gets a cut of their settlement.
The short answer is likely NO. In most instances, neither the IRS nor any income taxing state may count personal injury settlement as part of your gross income. Personal injury settlements are intended to compensate individuals for damages incurred (compensatory damages). Damages you receive for things like medical bills, pain and suffering, lost wages, long-term medical care or other major costs are not taxable.
There are, of course, exceptions to every rule.
While in general compensatory damages aren’t taxable, punitive damages are. Compensatory damages are those damages that are intended to restore the victim of an injury. Punitive damages are like the last pound of flesh – they are intended to punish the defendant for a particularly egregious action that go beyond negligence. An example of this would be awarding a hefty punitive damages settlement because a corporation placed faulty products on the market with knowledge that the products could cause harm. A drunk driving case could also generate punitive damages since a defendant can be said to have acted rashly in a behavior that could harm others.
Got a personal injury question? Our Dallas personal injury team has the expertise to take on complex cases, and we are successfully fighting for the rights of individuals. We’ve secured millions in damages in complex cases for our clients in Dallas, Tarrant, Denton and Collin Counties and beyond in North Texas. Call us to discuss your case.