As tax season approaches, many people start thinking about how various aspects of their lives will impact their tax returns. If you’ve recently received a personal injury settlement, you might be wondering—do I need to pay taxes on my settlement?
At Mory & Colliersmith, PLLC, we know how confusing taxes can be, especially after dealing with the stress of an injury case. We’re here to break down how the IRS treats personal injury settlements and what you should keep in mind this tax season.
Are Personal Injury Settlements Taxable?
The good news is that most personal injury settlements are not taxable. The IRS generally does not tax compensation you receive for physical injuries or illnesses. This includes:
Medical expenses
Pain and suffering (directly related to the injury)
Emotional distress caused by the physical injury
However, there are important exceptions:
When Are Personal Injury Settlements Taxable?
Lost WagesIf part of your settlement compensates you for lost wages, that portion may be taxable because wages would have been taxed if you had earned them normally.
Interest on SettlementsSometimes settlements accrue interest between the time the injury occurred and when the settlement is paid. This interest is typically taxable.
Punitive DamagesIf your case included punitive damages (awarded to punish the defendant), these are generally taxable.
Non-Physical Injury ClaimsSettlements related to emotional distress without a physical injury or defamation cases are also subject to taxation.
How to Prepare for Tax Season After a Settlement
If you’ve received a settlement this year, here are some tips to help you navigate tax season:
✅ Understand Your Settlement BreakdownReview your settlement agreement to see how the compensation was allocated. This breakdown will help determine what’s taxable.
✅ Keep Detailed RecordsHold onto all legal documents, medical bills, and settlement agreements. These records are crucial if the IRS requests clarification.
✅ Consult a Tax ProfessionalEven with general guidelines, every case is unique. A certified tax professional can provide tailored advice to ensure you’re fully compliant without overpaying.
Why Choosing the Right Attorney Matters
At Mory & Colliersmith, PLLC, we believe every client deserves respect, clear answers, and the best outcome possible. We don’t just help you get the compensation you deserve; we make sure you understand how it affects your life—including your taxes.
While tax season can bring extra stress, knowing that most personal injury settlements are not taxable can be a relief. For the portions that may be taxed, planning ahead and seeking expert advice is key.
If you’ve been injured in an accident—whether it’s a car accident, dog bite, slip and fall, or wrongful death case—we’re here to help you every step of the way.
📞 Call Mory & Colliersmith, PLLC at (502) 212-4333 or visit morycolliersmith.com to schedule a free consultation.
💡 P.S.: Tax laws can change. Always consult a tax professional for the most current advice regarding your specific situation.