Do I Have to Pay Taxes on My Personal Injury Settlement?

Taxes on My Personal Injury Settlement

If you were severely injured in an accident and have just spent months or years fighting to obtain compensation for your injuries, the idea of having to pay taxes on the settlement you’ve just received can be a frustrating one. After all, money in taxes is money that can’t be used to cover your medical bills, lost wages, and other expenses related to the accident – and you may be depending on the money from your lawsuit for years to come.

So, do you have to pay taxes on settlements? In many cases, the answer is no. However, it’s important to be aware of the rules regarding taxes on personal injury claims and how they could affect your settlement. Keep reading to learn more.

Different Types of Damages and Their Tax Treatment

When it comes to taxes on compensation from a car accident settlement payout or other personal injury claim, certain categories of compensation are taxable while others are not. Broadly speaking, compensation for physical injuries and related expenses is not taxable.

For example, any compensation you receive for your pain and suffering from an accident would not be considered taxable. This makes sense, as taxes generally apply to income, and the money from a personal injury settlement is not income in the traditional sense of the term. Rather, the money you receive from a settlement is supposed to make you whole and to compensate you for the harm you’ve suffered from your injuries. Some other types of compensation that are usually not taxable include compensation for medical bills and emotional damages related to physical injuries.

However, there are a few categories of compensation from a settlement that are usually considered taxable. Any money you receive to make up for lost wages is taxable, as this is considered income. Similarly, punitive damages are aimed at punishing a negligent party rather than making an accident victim whole, so that compensation is also generally taxable.

IRS Rules

It’s important to follow IRS rules for reporting income from a personal injury settlement. However, these rules aren’t always clear-cut. For example, compensation for medical bills after an accident is not taxable, but only if you did not take an itemized deduction for medical expenses in the previous tax year. Likewise, money received for emotional suffering related to physical injuries is generally not taxable, but if there’s no accompanying physical injury, you may have to pay taxes on this compensation.

The IRS has issued guidelines for how different types of compensation are treated under current tax law, but it’s a good idea to get help from a personal injury lawyer in El Paso to make sure you don’t get into any legal trouble while still minimizing your potential tax liability.

Confidential Settlements

While confidential personal injury settlements aren’t a matter of public record, you still have to report the income from the settlement to the IRS. Hiding income from a settlement can land you in serious legal trouble, so don’t try it. It is also important that your confidentiality agreement clearly describes what you are being compensated for so that you are not taxed on the entire amount. A personal injury lawyer can help you with this.

How Michael J. Gopin Can Help

It’s in your best interest to keep as much money from a personal injury settlement as possible, and an El Paso injury attorney can help. The lawyers at the Law Offices of Michael J. Gopin have decades of experience handling personal injury claims. They can help you structure your settlement in a way that allows you to keep as much money as possible while still complying with IRS rules. To learn more, call our office in El Paso today or visit our contact page.

Michael J. Gopin

Michael J. Gopin has practiced law in El Paso since 1987. Even after more than 30 years, he still remembers his first jury case. It was two weeks after receiving his license, when he represented a person whose life had been forever changed after being blinded in a work-related incident...


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