Do I Have to Pay Taxes on My Injury Settlement?

Are Personal Injury Settlements Taxable?

If you’re expecting a personal injury settlement and are wondering about statutory deductions, the good news is they are not taxable at the federal level. Section 104 of the IRC excludes taxable income from lawsuits, awards, and settlements.

The IRS exempts the settlement award from the usual taxation since the funds received are meant to compensate you for the losses you endured due to the injury.

Even so, the facts and circumstances of each settlement payment should be considered to determine each settlement’s purpose since some elements are not tax-exempt.

Awards and settlements are often divided into two groups to determine if the payments are taxable or non-taxable. The first group involves compensation related to physical injuries, and the second group includes claims related to non-physical injuries.

Here’s how the tax system works:

• Compensatory damages such as lost income received for physical injury are excluded from gross income, except for punitive damages.
• Damages from a non-physical injury such as emotional anguish, although usually included in gross income computation, are not subject to federal employment tax.
• Damages related to mental or emotional distress from non-physical injuries are only excluded from gross income and taxation on account of physical sickness or injury.

When Do Personal Injury Settlements Become Taxable?

Specific damages fall in the tax bracket, including punitive damages, previously deducted medical costs, punitive damages, interest on your settlement, and award for lost income.

Punitive Damages

While most elements in a personal injury settlement are tax-exempt, there is an applicable tax for punitive damages. Punitive damages are not available in all personal injury settlements; however, they are often awarded when the defendant’s actions are egregious.

A jury awards punitive damages not to compensate the injured victim but to punish defendants and deter bad behavior. The punitive damages award doesn’t reimburse your original state before the loss, so you may be taxed for the money you receive.

However, punitive damages are exempt if received after a wrongful death claim. The IRS considers the damages tax-exempt in states where state law only provides punitive damages for wrongful deaths.

Exception for Medical Expenses

It is possible to take an itemized deduction for medical bills for your injury in the years leading to the settlement. 

Suppose you claim the tax deduction for your medical expenses followed by compensation for the exact costs. In that case, you must declare income from the settlement meant to compensate you for the expenses you deducted against— if the deduction provided offered you a tax benefit.

For instance, if you took a tax deduction of $25,000 for injury-related medical expenses and received a settlement with payment of those expenses, you may need to declare up to $25,000 of your settlement as taxable income.

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 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
or contact us online.

The best way to ensure you comply with tax obligations after a personal injury recovery is by consulting a personal injury attorney and a tax professional. While determining the taxable elements of personal injury settlements is complicated, you may also face harsh tax penalties.

An attorney can apply their skills to maximize the settlement amount and help you comply with tax obligations.

Gary Burger

Founder | Injury Attorney
Gary Burger has dedicated his career to standing up against bullies. The founder and principal attorney of Burger Law | St. Louis Personal Injury Lawyer has helped hundreds of Missouri and Illinois individuals and families recover th …
Years of experience: 30 years
Location: St. Louis, MO

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