9/17/2024

After suffering from an injury due to someone else’s negligence, winning a personal injury
settlement can feel like a huge relief. You no longer have to worry about medical bills, lost
wages, or other expenses incurred as part of your accident. However, it is important to be
careful how you use your settlement because some of it can be taxed, as a personal injury
lawyer can explain:

What Is Taxable
Part of the purpose of a personal injury settlement is to cover lost wages — that is, wages you
would have earned at your job had you been healthy and working instead of injured. When you
work, you pay taxes on what you earn. A personal injury settlement can recoup those lost
wages so that you still receive the same amount of income you would have if you had been
working. And, just like at your job, that income is taxable, even though it was part of a
settlement.

Medical bills may also need to be included as income, which then means they will be taxed.
This happens if expenses related to your injury were previously deducted the year before.
Additionally, some settlements may accrue interest which is also taxable. Other kinds of
settlements that are taxable include those awarded for emotional distress. If you win a
settlement for emotional distress and it is not directly tied to a physical injury, this will be taxed.
That also means that if you are awarded damages to punish the defendant for their negligence,
those too are taxed even if they were connected to a physical injury.

Finally, as our friends at Cohen & Cohen can share, some attorney’s fees may be taxable.
However, there are many variables that contribute to this, mainly how those fees are structured
and if they are already being deducted from the overall settlement. Your lawyer will let you know from the start how that portion of this process works.

What Is Not Taxable
The main portion of your personal injury expenses are not taxable, meaning medical expenses
(so long as they were not previously deducted), pain and suffering, and emotional distress (if
you can prove it is a direct result of your injury). You receive compensation for the injury itself
and it is not seen as taxable income because the government views these payments as
restitution for what was lost instead of just providing income. Medical expenses are seen in a
similar light; you are receiving the settlement to cover your costs and not gain income.

It might seem confusing, but if you are awarded worker’s compensation, that is not taxable. That is because worker’s comp is considered a benefit offered by your job — think of it just like
insurance; this is a payout rather than straight income from your place of employment.

What To Do After A Settlement
To win a personal injury case, you will need to work with an injury lawyer. Once they win your
case, you should then contact a tax attorney. They will be able to help you best manage your
settlement and help you prepare for any taxes coming your way after winning it. Work with an
attorney so that you can focus on healing rather than worrying about what you will owe in the
future. Contact a lawyer near you today for help.