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Are Personal Injury Insurance Settlements Taxable?

Most times people sue for personal injuries, they do so because someone else’s gross negligence caused significant damage and harm. While the initial mistake may seem harmless to the person who made it, the repercussions can be long-lasting and can even prevent the person who sustained the injury from ever working again. Thus, sometimes the settlement can be quite large; however, many individuals who do sue for personal injury might fear the tax repercussions of receiving such a significant amount of money.

Many personal injury cases settle before even going to trial. Once you accept the defense attorney’s settlement offer, the case is done, and all your lawyer needs to do is let the defense know you accept the offer by email, phone, letter, fax, or a combination of these. Part of your settlement will go to pay your attorney’s fees, but what about the rest?

In general, the proceeds received from most personal injury claims are not taxable under federal or state law. Federal tax law excludes damages received as a result of personal physical injuries or physical sickness from a taxpayer’s gross income. So any money you receive to compensate you for your lost wages, medical bills, pain and suffering, loss of consortium, and attorney fees aren’t taxable as long as they are to reimburse you for a personal injury or physical illness.

However, there are some exceptions. If your injury or physical sickness resulted from a breach of contract, your compensation amount could be taxed if the basis of your lawsuit is the breach of contract. Likewise, any amount awarded in punitive damages is always taxable. Punitive damages are awarded as a punishment to the guilty party as a means to prevent them from making the same mistake in the future. Likewise, if your settlement includes interest, the interest will be taxable.

Last, a personal injury settlement can’t be taxed for any physical harm, but if your suit is only based on emotional distress, the money you claim would be taxable unless you can prove even the slightest amount of physical injury was present as well.

If you’re concerned about your case, don’t hesitate to give us a call. Our skilled San Jose personal injury attorneys would be glad to help you navigate your situation. Habbas & Associates has more than 200 years of combined legal experience to offer. Over the course of our firm’s history, we have recovered more than $300 million in verdicts and settlements for our past clients. Let us provide you with compassionate and experienced advocacy, so you and your family don’t have to face this challenge on your own. We can look over your case and use our skills to create the most effective strategy to meet your goals.

Contact us at (888) 387-4053 or fill out our online form to schedule a free case consultation today.

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