Are PI Settlements Taxable?

If you receive a personal injury settlement, it is important that you understand the rules surrounding that settlement, including any tax obligations.

Being involved in a serious accident that leaves you with a major injury can be extremely upsetting and scary, as well as costly - medical bills, lost wages, property damage costs, and noneconomic losses can total into the tens or hundreds of thousands of dollars, leaving many with questions about how they will survive financially after a serious crash. At the Law Office of Raul A. Guajardo, P.L.L.C., we can help you recover the compensation award that you deserve. However, after the process is completed, you will need to understand another financial aspect: Are personal injury settlements taxable?

Types of Damages in a Personal Injury Lawsuit

The first thing that is important to know about the taxable nature of a personal injury settlement is the types of damages that are recoverable in a personal injury lawsuit. Common types of damages include:

  • Medical expenses - paid to compensate a plaintiff for the full value of medical expenses related to their accident and injuries;
  • Lost wages - paid to compensate a plaintiff for lost wages, including future lost wages and loss of earning capacity, that they have suffered as a result of the accident;
  • Property damage expenses - if the plaintiff suffered any damages to property during the accident; and
  • Non-economic losses - including compensation for pain, suffering, disability, diminished quality of life, and emotional distress.

What is Taxable?

According to the website of the IRS and a publication issued by the IRS titled, “Settlements Taxability,” whether or not you must include the settlement proceeds in your income when filing taxes depends on the facts and circumstances of your case.

  • Lost wages and income. Compensation for lost wages and income is nearly always taxable as income. The IRS states that these proceeds are “subject to employment tax withholding by the payor and should be reported by you as ‘wages, salaries, tips, etc.’ on line 7 of Form 1040.”
  • Medical expenses. The rules surrounding medical expenses are more complicated. Typically, the full amount that you receive for medical expenses will not be taxable unless you took an itemized deduction for medical expenses when filing your taxes the previous year(/years).
  • Noneconomic damages - emotional distress and anguish. If you have received a settlement for noneconomic losses, including compensation for emotional distress, anguish, and pain and suffering, the amount received will not be subject to taxes so long as the compensation is related to a physical injury. For example, if you suffered a TBI and this led to noneconomic harm, you won’t need to pay taxes on the settlement; however, if you are receiving noneconomic compensation as a result of a defamation lawsuit that did not involve a physical injury, you will need to pay taxes on the amount received.
  • Punitive damages. Like compensation for lost wages, punitive damages, even if related to a physical injury or illness, are taxable as income and must be reported to the IRS.

Talk to a Professional Today

If you are pursuing a personal injury settlement, working with an experienced Edinburg injury lawyer is within your best interest. Attorney Raul A. Guajardo can answer any questions that you have about tax liability, as well as represent your best interests throughout the claims process. Call today to schedule a free consultation.