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How Much Tax Is Paid on Lawsuit Settlements?

paying taxes on your settlement

Personal injury claims allow people to recover compensation for the losses they have suffered in an accident. However, the process can feel complicated and overwhelming. Considering the tax implications of your settlement can make the situation feel even more confusing. Do you have to pay tax on your settlement? How much tax is paid on lawsuit settlements?

Much of what you receive in a personal injury settlement will be exempt from taxes. However, there are some important exceptions to consider. While the amount of tax you may have to pay on your compensation depends on the unique circumstances of your case, there are a few general principles that might clarify your situation.

Compensation versus Gains

The purpose of filing a personal injury claim is to request compensation for losses you suffered from an accident. In other words, the financial award you receive is designed to put you in a financial position equal to where you would have been if the accident had never occurred. This means that much of the money you receive cannot be classified as gains.

Your settlement will be tax-free as long as it meets the following two conditions:

  • The compensation is for observable bodily harm, such as physical injuries or physical sickness
  • The compensation has come about because of an unexpected injury, such as a car accident or a slip and fall

In cases where these two conditions are true, you will not have to be concerned about how your settlement will affect your tax situation.

When Personal Injury Settlements Can Be Taxed

settlement money - taxes

While compensation for physical injuries such as organ damage, sickness, or broken bones may not be taxable, compensation for things such as emotional or psychological harm can be taxed.

Furthermore, if you have already deducted the cost of an injury in a previous tax year, your compensation for physical injuries may still be taxable. This generally applies only to lawsuits that conclude a year or more after the injury occurs.

Any portion of the settlement you received as compensation for lost wages is also taxable as income.

Taxation and Punitive Damages

Some personal injury cases qualify for punitive damages. These damages are designed to punish the defendant in cases of willful misconduct, malice, fraud, oppression, or reckless indifference to human life. A jury may award these damages in addition to the plaintiff’s compensatory damages.

IRS guidelines state that a plaintiff who receives punitive damages must report them as “other income.”

If some of your personal injury settlement is subject to taxation, you will not be able to write off your legal fees when you file your taxes.

Furthermore, the IRS will tax the total amount of any taxable portion of your settlement, even if a percentage of that amount goes toward paying your legal fees.

The relationship between taxes and personal injury settlements is far too complex to be summarized in a general way. The most effective way to understand what your tax burden might be after your settlement is to speak to an experienced personal injury lawyer.

How Our Attorneys Can Help

While some people feel tempted to file personal injury claims on their own, there are many ways an experienced lawyer can help. The attorneys at Chris Hudson Law Group can take all the necessary steps on your behalf, looking out for your best interests along the way.

We can also negotiate with the insurance company so that they do not intimidate you into accepting a lowball offer that will not cover your losses. One way they may try to do this is to pressure you into accepting a swift tax-free settlement that does not compensate you for the psychological harm the accident has caused. Our attorneys will always fight and negotiate for the full and fair compensation you deserve.

Speak with an Experienced Augusta Personal Injury Attorney Today

If you suffered injuries in an accident that was not your fault, you need a lawyer who can fight for the compensation you deserve. The seasoned legal team at Chris Hudson Law Group in Augusta has developed a reputation for excellence across Georgia, and we are ready to put our knowledge and skills to work for you. We specialize in a wide variety of cases, from car accident cases to workers’ compensation, and medical malpractice.

Call our Augusta personal injury attorneys today at (706) 690-4613 or contact us online for a free consultation and learn more about your legal options.

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Last Updated : December 6, 2022