All Questions

December 29, 2022 | Gary Burger

Do I Have to Pay Taxes on My Injury Settlement?

Do I have to pay taxes on my injury settlement? You've finally settled your personal injury claim, or gotten a successful jury verdict. Now you're likely facing a new uncertainty: will you have to pay taxes on the money you receive as compensation?

Personal injury attorneys are acquainted with the complex regulations involving settlements and taxation and can explain how taxes will apply to your specific case. At Burger Law, we have over 30 years of experience getting great results for our clients, and we answer questions for free every day. If you have any questions about the personal injury claim process, speak to a member of our team today at (314) 500-HURT or fill out our online form. With offices in St. Louis, Chicago and elsewhere, we serve the injured throughout Missouri and Illinois.

If you were recently injured and want to know how much your claim may be worth, fill out our free personal injury calculator.

When Do You Have to Pay Taxes on Injury Settlements?

Generally, the IRS taxes income – something that makes you wealthier than you were before. Since the purpose of most types of compensation in an injury claim is to "make you whole", most settlements and verdicts aren't taxed. However, there are notable exceptions based on what kind of settlement you receive and under what circumstances. Settlements and judgments are generally viewed under the same tax laws, so it doesn't matter if you receive your money through a settlement or a trial verdict. The details on when you have to pay taxes off a settlement or verdict can be found in Internal Revenue Service Regulation 26 C.F.R 1 and Publication 4345.

Whether or not you have to pay taxes on your settlement will depend on the type of compensation you receive:

  • Medical expenses — If you did not take an itemized deduction on a previous year's tax return, any settlement related to expenses for an illness or injury are not taxable. Meaning, you do not have to pay taxes on any compensation you receive for an emergency room visit, chiropractic appointments, medications, or any other medical expense.

    However, if your insurance covered part or all of your medical expenses, they have a right to place a lien on your settlement. You can read more about how personal injury lawyers reduce liens in an injury case here.

  • Non-economic damages Any compensation related to emotional distress, mental anguish, pain and suffering, inconvenience or any other general damages are also not taxable.
  • Lost wages — If you're compensated for lost income, that amount will generally be subject to income tax, since your original income would have been taxable if you hadn't had income loss. But, it's important to note that you only have to pay taxes on the compensation directly related to your lost wages damages. For example, if you recovered a $100,000 settlement, but only $5,000 of that was for lost wages, you would only have to report the $5,000 as income. The other $95,000 is not taxable.
  • Property damage — Compensation for property damage, for example damage to your vehicle in a car accident, is generally not taxable, so long as you don't have any money left over once your property has been repaired or replaced. Any extra, for example if the insurance company overpaid you or you carried out the repairs yourself, must be taxed as income.
  • Punitive damages Though rarely awarded, punitive damages from a defendant who exhibited especially dangerous or egregious behavior are subject to taxes and must be reported as "Other Income" on your Form 1040.

    Additionally, certain states have laws that may affect how much of your punitive damages you retain. For example, in Missouri, under Revised Statutes §537.675, the state may claim up to 50 percent of your punitive damages award for the state's Tort Victims Compensation Fund.

In short, any compensation you received for the direct financial, physical and emotional harm you sustained because of your injuries will not be taxed. Anything "extra" or deemed to be over that amount, is taxable as income.

Missouri and Illinois Personal Injury Attorneys | Burger Law

The personal injury claims process and legal precedent are confusing for anyone who hasn't had experience with them. At Burger Law, we have over 70 years of combined experience as trial attorneys, who always strive to put as much money in our clients' pockets as is fair and possible. If you've been injured by the negligence of another in Missouri or Illinois, or have any questions about your claim, speak to a Burger Law personal injury lawyer at (314) 500-HURT or contact us online.