Is a personal injury settlement considered income in Missouri?

Receiving a personal injury settlement can be frustrating. Is a personal injury settlement considered income? The answer isn’t always simple, but understanding how this will impact your taxes is essential. Settlement money generally isn’t taxable under federal law in most cases, but exceptions exist depending on the type of damages. At Burger Law, we would like to help residents of St. Louis, MO, navigate through this often confusing issue.

Tax implications of settlements and judgments

When you win a personal injury case or settle it out of court, your settlement or judgment income will be taxed based on what type of damages it covers. Compensatory damages designed to cover physical injuries or illness are usually exempt from federal tax. Conversely, punitive damages or compensation for nonphysical injury or emotional distress may be taxable.

The IRS protocol for the taxability of your settlement is based on federal and state guidelines that separate compensatory damages from punitive or non-physical damages. Damages awarded to compensate for medical expenses lost wages because of injury, or property repair, for example, are typically tax-free. However, punitive damages,  designed to punish the defendant or settlements resulting from emotional distress not tied to physical injury, are generally categorized as taxable income. Any interest you earn on your settlement amount is also taxable, which should be considered. Understanding these distinctions helps you comply with tax regulations while also safeguarding your financial interests.

Is settlement money considered income in St. Louis?

For St. Louis residents, the state of Missouri and the federal government do not consider most personal injury settlements to be income. But there are key exceptions to keep in mind. Compensation for medical bills, lost wages due to physical injuries, and property damage is generally exempt. However, parts of a settlement designated for punitive damages or nonphysical claims, like emotional distress, could be considered taxable income under federal rules.

What types of settlements are taxable and nontaxable?

Taxable

• Punitive damages: Money awarded to punish the defendant rather than compensate the plaintiff is federally taxable under Missouri law.
• Emotional distress unrelated to injury: If your settlements compensate you for emotional suffering even though you suffered no physical injury, it’s generally considered taxable.
• Interest on the settlement: Any interest earned on the settlement amount is subject to tax as an income.

Nontaxable

• Physical injury or illness damages: Payments for medical bills or lost wages due to physical injury are tax-exempt.
• Property damage awards: Compensation for repair or replacement of damaged property is not taxable to the extent the amount does not exceed the value of the property.
• Medical reimbursements: Reimbursement of prior and future medical expenses related to physical injury are non-taxable.

“I’ve dedicated my entire life to helping our clients receive full compensation for their injuries.”

Gary Burger

Personal Injury Attorney

What to know when filing taxes after a settlement?

When you’ve gotten a settlement in St. Louis, it’s critical to read the settlement agreement carefully. Under IRS guidance, the allocation of damages must be reasonable and outlined in the agreement to identify which portions are taxable and to whom. This ensures that compensatory damages for physical injuries, which are usually non-taxable, will not be misclassified. Ensure a correct classification of various item listings to avoid unwritten tax liabilities and adhere to federal and Missouri guidelines.

Equally important is to keep meticulous records. Save all the relevant documents, such as medical bills, legal agreements, and correspondence related to the settlement, as supporting documents in case of any need for tax filings. The Missouri Department of Labor also gets into the nitty-gritty about how worker’s comp settlements affect tax returns for injured workers. Seeking advice from a tax professional may also be beneficial if you navigate a more difficult situation, especially if your settlement includes taxable items such as interest or punitive damages.

Do you need a lawyer for a Personal Injury Settlement?

Although working with an attorney is not a legal requirement, it is preferable to resolve the matter to maximize your settlement amount and minimize your tax consequences. An experienced personal injury attorney in St. Louis will know how to classify damages correctly, reduce taxable amounts, and ensure compliance with Missouri laws, maximizing your compensation.

Contact Burger Law for Personal Injury Expertise

At Burger Law, we know the ins and outs of Missouri tax laws and personal injury settlements. Whether you’re settling or doubting the tax implications, we can guide you through every step. Contact us today at (314) 500-HURT to secure the compensation you deserve while protecting your financial future.

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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