Personal injury victims are often faced with immense physical pain, emotional trauma, and financial distress. The financial compensation awarded through personal injury lawsuits can provide crucial support to injured parties during times of hardship. However, many plaintiffs wonder if the money awarded to them in personal injury lawsuits is subject to state or federal taxation.

As a general rule, the majority of proceeds awarded as part of your personal injury claim cannot be taxed. Damages awarded as part of an injury claim are not taxable under federal or state law. However, some exceptions do exist. For example, punitive damages awarded as part of an injury lawsuit are taxable. Further, interest awarded as part of a personal injury case may also be taxed. An experienced personal injury lawyer can help victims recover the maximum amount of compensation available to them.

Types of Damages that Cannot be Taxed After Receiving an Injury Settlement

There are numerous categories of monetary damages that can be awarded in personal injury lawsuits. The majority of which cannot be taxed. The following are examples of monetary damages that are free from federal and state income taxation:

Medical Expenses

Personal injury victims may be compensated for any medical expenses related to the harm they suffered. All past, current, and future medical bills may be covered. In such cases, the compensation awarded for victims’ medical expenses cannot be taxed.

Pain and Suffering

Damages for pain and suffering related to a personal injury are another type of damages that cannot be taxed. Plaintiffs may recover compensation for the physical pain and emotional suffering they endured because of their injury. As long as these damages stem from a physical injury, they cannot be taxed. Your Alpharetta personal injury attorney can help you receive the highest amount of non-taxed damages possible.

Out-of-Pocket Expenses

Additionally, damages for out-of-pocket expenses cannot be taxed. There are a wide range of out-of-pocket expenses victims may incur because of a personal injury. For instance, a victim may be forced to pay for costly assistance with child care while they recover from their physical injuries. These damages are also free from state and federal taxation.

Property Damage

Compensation for property damage may also not be taxed. For example, after a car accident, a victim may incur serious damage to their vehicle. In that case, the victim may recover tax-free compensation for the cost of repair or replacement of their vehicle as part of their personal injury claim.

Lost Wages Related to a Physical Injury

Lastly, damages awarded for lost wages related to a personal injury cannot be taxed. As long as you can trace your compensation for lost income back to a physical injury, it will not be subject to taxation.

There are some cases where damages awarded for lost wages may be taxed. For instance, if you received compensation for lost wages as part of an unlawful discrimination claim, then those damages may be taxed. The damages must stem from a physical injury in order to be protected from taxation.

Types of Damages that Can Be Taxed After Receiving an Injury Settlement

In some cases, punitive damages may be awarded to punish a grossly negligent defendant and discourage their behavior. Compensation awarded as a form of punitive damages may always be taxed. Punitive damages are only awarded under rare circumstances. If punitive damages are awarded in your case, a personal injury lawyer can help separate the claim for punitive damages from your claim for non-taxable, compensatory damages. Accordingly, you can more easily prove to the IRS that part of your verdict was for non-taxable compensation.

Also, interest on your personal injury judgment is also taxable. In most states, courts will add interest to a particular verdict for the length of time the case was pending. For example, if you filed your case on January 1, 2020 and did not receive payment until January 1, 2022, you will receive two years’ worth of interest on your unpaid verdict. That interest is taxable. An experienced personal injury lawyer can help explain how taxable interest may affect the value of your claim.

How are Injury Settlement Awards Taxed?

Taxable settlements will be reported as other forms of income earned by successful plaintiffs. For example, punitive damages should be reported as “Other Income” on tax forms and will be taxed accordingly. Furthermore, interest accrued on any injury settlement should be reported as “Interest Income” to the IRS and will be taxed as such. A personal injury lawyer can help explain how your injury settlement awards may be taxed.

What is the Tax Rate on a Personal Injury Settlement?

Most monetary damages awarded as part of your personal injury settlement will not be taxed. However, the portions of compensation that are taxable will be taxed just like income. The amount to be taxed will depend on the size of the settlement and what taxable income bracket it landed the plaintiff in. You can reach out to a personal injury lawyer for help determining the tax rate on your personal injury settlement.

What Injury Cases Typically Have the Highest Payouts?

The amount of compensation awarded in a personal injury case can depend on a variety of factors. In most cases, the monetary damages awarded will depend on the extent of injuries suffered by the victim. The following are examples of injury cases that are prone to producing the highest payouts:

  • Car accident law firm cases
  • Truck accident cases
  • Motorcycle accident cases
  • Defective product cases
  • Medical malpractice cases
  • Slip and fall accident cases

If you were injured because of another person’s negligent actions, you can reach out to a personal injury lawyer for help determining the value of your case.