Are Injury Settlements Taxable

Are Personal Injury Settlements Taxable?

If you’re facing a personal injury settlement, you likely have many questions. When will your case settle? What will the verdict be? How will the judge distribute your funds? And, finally, is the settlement taxable?

The last consideration is a common one for people living in Florida, especially around tax time. Today, we’ll cover the ins and outs of personal injury lawsuits, and what you need to know about the IRS tax rules surrounding them. 

Personal Injury Settlements 101

If you’re filing a personal injury claim, you don’t generally have to worry about taxation. As a rule, the proceeds generated from a personal injury claim are not taxable by either state or federal law. This is true whether you settle the case out of court, or after filing a lawsuit and going to court with a personal injury attorney

A settlement like this provides funds to help with the expenses and difficulty associated with an injury. Because of this, federal tax law excludes them from gross income calculations. 

When Personal Injury Settlements are Taxable

In the state of Florida, most personal injury settlements are not considered taxable under state law. These personal injury settlements are typically not taxed by federal law, either. Instead, federal tax laws exclude the damages a person receives from a personal injury settlement. The reason for this is simple: personal injury damages are designed to pay for things like attorney fees, pain and suffering, and medical bills. Because of this, personal injury settlements are considered a liability rather than an asset. This means that people who get settlements on their claims won’t get hit by an unexpected tax bill at the end of the year. 

That said, there are some rare exceptions. Specifically, some of the damages you receive alongside your personal injury claim may be taxable. These include the following:

  • Interest. The IRS sees interest as a form of income that goes above the cost of the initial settlement. Because of this, it may be considered taxable income. 
  • Emotional Distress. Emotional distress and mental anguish are typically not considered taxable. The exception, however, comes when the awards for emotional distress and mental anguish are not directly related to the injury. In these cases, the settlement may be considered income. 
  • Lost Wages. Wages are considered part of your income. Because of this, the IRS may see settlements for lost wages as taxable income. 

There are several other situations in which the IRS may decide a settlement is taxable. These include cases of discrimination, harassment, wrongful termination, and defamation. Because these situations vary so widely, though, it’s critical to work with a personal injury attorney who can guide you through the process. 

Securing a Skilled Personal Injury Attorney

If you’re filing a personal injury suit in Pensacola or the surrounding area, you need to hire a skilled personal injury attorney to protect your interests. Here at Ward and Barnes, we specialize in helping you with your injury suit and understand the financial implications of doing so. Contact us today to learn more.