We are often asked by clients if a personal injury settlement award is taxable. In general, whether a case for physical injury or sickness is resolved through a negotiated settlement, or through winning at trial, those proceeds for your injuries and pain and suffering are not taxed. Whether your settlement is taxed or not often depends on the type of damages you are receiving and sometimes on the structure of your settlement. For example, awards for loss of consortium and damages for lost wages are also usually tax free. Also, most damages for an award as a result of a wrongful death action are not taxed.
There are a few exceptions to the general rule that personal injury settlements are not taxed. For example, if you receive any money as a result of any punitive damages that money is most likely taxable. If you receive any money for any interest, that money is most likely taxable. In most cases, damages awarded for emotional distress are taxed as well. There may be certain medical deductions or other factors that may affect your taxes.
Regardless of the type of settlement you receive in your personal injury case, it is important to speak to your Certified Public Account (CPA) or tax attorney about any possible tax implications from your personal injury settlement award.