Is Your Personal Injury Settlement Considered Taxable Income?

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Is Your Personal Injury Settlement Considered Taxable Income?

Taxes are probably the last thing on your mind when you are injured in an accident. But if you plan to settle a personal injury lawsuit, it’s important to know whether or not your settlement will be considered taxable income. Knowing how much compensation you can expect will help you plan appropriately for paying your medical bills and any other expenses associated with your injury. 

The experienced attorneys at Van Norman Law in Scottsdale can help with every aspect of your personal injury case, including the taxability of your settlement. Continue reading to learn more about the taxable and tax-exempt elements of personal injury settlements. 

Are Personal Injury Settlements Taxable in Arizona?

In most personal injury cases, compensation received from a settlement is not considered taxable income under federal or state laws. According to federal law, gross income does not include damages received as a result of personal injuries or physical sickness.  

However, there are some aspects of your settlement that could be taxable. Damages received for other reasons such as emotional distress or punishing the defendant are subject to taxes. It’s important to consult with an experienced personal injury attorney before filing suit to ensure that you will be able to keep as much of your compensation as possible. 

The Taxable Elements of a Personal Injury Settlement

1: Emotional Distress

If you receive compensation for emotional pain or distress, then those damages are subject to taxation. However, if the emotional distress is the result of a physical injury caused by the accident, the damages might not be considered taxable income. 

For example, say you were crossing the street when a driver hit you and injured your back. That injury causes you chronic pain, and you develop depression as a result. You could be entitled to compensation for emotional stress, which would not be subject to taxation. 

However, if you were hit by a car and sustained no injuries, but still developed depression, any damages you receive for emotional distress would, in fact, be taxable. 

2: Punitive Damages

If you are awarded punitive damages in your personal injury settlement, then the amount you receive is taxable. Punitive damages are meant to punish the defendant for your lost wages, pain and suffering, etc. Make sure to ask the judge how much of the judgment was punitive, so you can calculate the exact amount you will owe in taxes.

3: Interest

If the defendant doesn’t pay the damages right away, the amount owed will start to accrue interest over time. When you finally receive payment, you will need to pay taxes on the accrued interest. 

The Tax-Exempt Elements of a Personal Injury Settlement

You will not have to pay taxes on portions of your settlement relating to:

  • Medical bills (including hospital stays, surgeries, physical therapy, etc.) that are a result of the injury
  • Lost wages that were a result of the injury
  • Pain and suffering from the injury
  • Emotional distress that is a direct result of the injury
  • Attorney fees related to your case
  • Loss of consortium if your case involves a death of a family member

Do You Have to Report Your Personal Injury Settlement to the IRS?

You do not have to report your personal injury settlement to the IRS in certain cases. If you received compensation for personal physical injuries or physical sickness, and you did not make any itemized deductions on your taxes for medical expenses related to your injury, you do not have to report it to the IRS. In all other situations, you will need to report your settlement. 

Personal Injury Lawyer in Scottsdale

Whether you were injured due to a fall, a car crash, or another type of accident, you’ll need an experienced personal injury lawyer on your side. The team at Van Norman Law will fight for you to claim the compensation you deserve. We can help you understand whether your settlement will be considered part of your taxable income. Call 480-481-0616 today to schedule a consultation. 

Images used under creative commons license – commercial use (9/12/2022). Photo by Alexander Mils on Unsplash