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Are Personal Injury Settlements Taxable?

Are Personal Injury Settlements Taxable?

Now that it’s April, taxes are on everybody’s mind. Of course, for many of us, taxes are in the back of our minds throughout the year, especially for the independent contractors. Regardless if you’re on W2s or 1099s, if you’re anticipating a personal injury settlement, you’re going to ask, “Do I have to pay taxes on my personal injury settlement?”

For starters, you should know that it’s unlikely your case will go to trial. We say this because over 90% of personal injury cases settle out of court. This is due to the fact that jury trials are unpredictable and it usually benefits both sides to reach a settlement. However, that does not mean that your case won’t go to trial because it’s possible.

If you accept the other side’s offer, your case is “settled.” From there, all your personal injury lawyer needs to do is notify the other side that you’ve accepted their offer. Once your attorney’s contingency fees are taken out and your check is cut, can you do what you please with the money, or do you have to set aside a percentage of the settlement for Uncle Sam? As a general rule, the proceeds from personal injury claims are not taxable under state and federal law, with limited exceptions.

Which Damages Are Not Taxable?

“What if I settled at trial, does that make my settlement taxable?” It doesn’t matter if you settled inside or outside of court, the money received through personal injury claims is not typically taxable. The following personal injury damages are meant to compensate the injured party (the plaintiff) for their losses, and are not counted as taxable income as long as they relate to an actual physical injury or illness:

  • Lost income
  • Medical expenses
  • Emotional distress
  • Pain and suffering
  • Attorney fees
  • Loss of consortium

As we mentioned earlier, there are “limited exceptions” to the non-taxable rule. The limited exceptions include: 1) punitive damages, 2) a personal injury or illness directly related to a breach of contract, 3) interest received on a judgement, and 4) settlements from claims involving emotional distress or employment discrimination (not a physical injury or illness). In light of the above information, as long as your settlement involves a physical injury or illness, it should not be taxable.

To file a personal injury claim, contact our office to meet with a Columbia, SC personal injury attorney who cares about your future.

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