Are Personal Injury Settlements Taxable? 


If you have been hurt due to the negligence of someone else or their willful wrongdoing, you can initiate a civil action to collect compensation for your losses. You may be compensated for monetary damages if you win your lawsuit or reach an out-of-court settlement. 

When you obtain compensation, you may ask if your settlement is taxable. After all, you often receive a big sum from an injury settlement – and the government typically takes a portion when you are paid. If you have any questions, a Boston personal injury lawyer can help, so schedule an appointment today. 

What is a personal injury settlement? 

If someone does you harm, you have the right to file a claim for compensation to be “made whole” for your losses. You can file a civil action in court, and if you prove your claim, the court will pay you damages. You could also try to reach an agreement. 

As a result of those negotiations, personal injury compensation is paid. Typically, you will negotiate with an insurer representing the person or corporation who injured you, such as auto insurance, homeowner’s insurer, or malpractice insurer. Personal injury settlements can range from tens of thousands to millions of dollars. That is why it is critical to address the question, “Are personal injury settlements taxable?” 

Are personal injury settlements federally taxable? 

The good news is that personal injury settlements are not federally taxable. This means that the IRS will not take any of your money. Since the funds received are designed to compensate you for losses, the federal government does not charge taxes on your settlement money. This is true for genuine economic damages (such as medical costs and missed pay) and non-economic damages like pain, suffering, and emotional anguish. 

It is crucial to emphasize, however, that pain, suffering, and emotional anguish are not taxable only if there is physical harm. Mental distress damage would be taxed if, for example, a dog leaped at you and caused you to suffer from PTSD, but you were not physically wounded. 

Economic damages are not taxed since you are merely recouping lost income. In contrast, non-economic damages are not taxed because they are intended to assist in making up for losses for which you cannot receive direct compensation, such as pain and suffering. 

As these are compensatory damages, the government considers you suffered a loss equal to the money you got, and hence your settlement is not taxable income. For more details, speak to an experienced personal injury attorney today. 

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