Do You Need to Pay Tax on Lawsuit Settlements? | Kisling, Nestico & Redick
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Before you file your taxes, this year, do personal injury damages count as gross income?
Written by
KNR Legal
Date posted
March 31, 2023

Once you’ve received your settlement for your personal injury case, you should feel relieved. After all, not only have you been facing the prospect of a trial to get the compensation you deserve, but you’re also recovering from an accident caused by someone’s negligence.

However, knowing you are getting a settlement doesn’t mean your money worries are over. You should consider whether you need to pay taxes for your settlement, how much you might owe, and who can help you calculate any taxes.

Will My Personal Injury Settlement be Taxed?

After you’ve fought for compensation for damages or injuries caused by someone’s negligent behavior, you probably want to make sure you keep every cent possible. So it’s good news that any settlement for a physical injury won’t require you to pay taxes.

According to the Internal Revenue Service, the Service taxes your gross income. “Damages received” from personal physical injuries are not considered gross income, so the settlement is exempt.

Are There Exceptions to That Rule?

You should still pay attention to your settlement. You might have to pay some tax for any “punitive damages.” Punitive damages are available in cases where the defendant was grossly negligent or intended to commit a wrongful act, leading to your injuries.

These damages punish the defendant and deter others from behaving similarly. They aren’t awarded in most personal injury cases, but your attorney should explain this when reviewing your options.

Are All Punitive Damages Taxed?

There can be exceptions to the punitive damages rule, too. According to the IRS, punitive damages won’t be counted in your gross income, but taxes won’t be assessed in wrongful death cases. A personal injury attorney will be able to explain the nuances surrounding personal injury claims.

Follow Tax Law: Tips for Your Settlement

As you accept your settlement and prepare your taxes, pay attention to how the money is labeled or distributed. The IRS will be checking for any taxable amount you’ve received.

You need to ensure you’re as prepared as possible for any audits or questions that come your way. There are a few ways to handle this situation.

  • Structure your settlement to be as non-taxable as possible. If you’re worried about getting taxed on any damages you recover in a personal injury case, you can speak with your lawyer before any amounts are settled on. They can help you create a settlement with as few taxes as possible.
  • Keep your records and document everything. It’s a good idea to keep track of all your expenses and income, especially if you aren’t sure what could be tax-eligible. Double-check with your attorney or accountant even if you think something might be tax-exempt.

How can a Personal Injury Lawyer Help Protect My Settlement?

Even when you have the most solid case, you should call a personal injury attorney to ensure you get the most compensation available. Insurance companies will be reluctant to make settlements, but an attorney can help you get the money you deserve after someone’s negligent behavior causes your injuries.

If you successfully receive a settlement, you should continue working with your attorney to make the most of it. Your attorney can help you decide where to allot your money and help you organize everything to avoid taxation.

Call KNR for Help With Your Settlement

The attorneys at Kisling, Nestico & Redick understand how payments might be offered and what parts of your settlement could be taxed. We know how stressful personal injury claims can be, especially as you work on healing or repairing your property.

We’re the Ohio attorneys you need to help you with your personal injury case. KNR attorneys understand how settlements might be taxed, and we know securing claims is half the battle when it comes to compensation.

Call 1-800-HURT-NOW or use our online form to schedule your free initial consultation.