Is Your Injury Settlement Or Verdict Taxable?
So you’ve gotten your personal injury settlement, or you win a verdict from a jury. This is good news, of course. You know you’ll have to pay some of that settlement to pay some medical bills and some costs surrounding your case. But there’s someone else you may have forgotten about: Uncle Sam. Can the government actually tax you for the money that you win in a personal injury settlement or verdict?
The answer depends on a number of factors. To see if your settlement or verdict is taxable, you need to break down what you received into categories; some will be taxable and some will not.
Wages are Taxable
As you can imagine, since the government taxes your wages, any amounts that you recover that represent money for lost wages, will be taxable. You would have paid taxes had you made that money at work, so the government will want their taxes when you get that money from a defendant or a jury. That includes current lost wages as well as any future lost wages that may be awarded.
The good news is that compensation for most everything else is not taxable. That means any compensation for pain and suffering, mental anguish, anxiety, or any other type of non economic award, is not taxable (so long as you were physically injured; in cases where damages can be won without physical injury, such as for sexual harassment or employment discrimination cases, the award for pain or suffering or mental anguish may be taxable).
Additionally, money given to you to pay for any money you paid or that you owe for your medical treatment is not taxable-but only if you did not claim those bills as a deduction on any prior tax return.
Any reimbursement is also not taxable, so if there was some expense that you incurred as a result of the accident, and that was awarded to you, that is not taxable. That makes sense–that money is just replacing money that you lost after the accident; it isn’t “new money.”
Breaking Down a Settlement
The practical problem here is breaking what you receive down. In trial, a jury will usually break down what they award to you–you will know how much of your award represents lost wages or pain and suffering. But when you settle this isn’t always the case; often the settlement just gives you a lump sum, not broken down into specific categories.
If you do not have a lot of lost wages, it may be best to try to break the settlement down, as a way of showing the IRS that very little of your settlement amount is taxable. Additionally, the use of structured settlements, which are often used in larger payouts, can also minimize your tax burden or eliminate taxes on your settlement completely.