Are Personal Injury Settlements Tax-Free?

One of the most frequently asked question, is whether or not a personal injury settlement is taxable. It’s a question we hear, time, and time again. First and foremost, the vast majority of most personal injury cases settle before going to trial. Only a small percent actually ever go to verdict. In many cases, cases that go to trial are settled before the verdict is even reached. In order for a case to be settled, the victim has to accept the offer being made to his/her attorney.

In a perfect world, once a settlement is reached – you’d get the money, “uncut.” Unfortunately, sometimes Uncle Sam can try to get his hands on some of your money

When is the compensation not taxable

Compensation for PHYSICAL personal injuries is not taxable. Proceeds derived from personal injury claims resulting from physical injuries are not taxable under federal or state law. Regardless of when you settle/reach a verdict, it’s not  taxable. Federal tax law specifically states that damages received as a result of physical injuries or anything related to physical pains, is excluded from your gross income.

When is the compensation taxable

Punitive damages are taxable. If you have a punitive damages personal injury claim, your lawyer should ask the judge to separate the verdict into a compensatory damages verdict, and a punitive damages verdict. This lowers your overall tax liability, since it prevents the taxes from being calculated on the entire verdict.

Another portion of your verdict which is taxable is the interest on the judgement. Many states in the USA have rules which add interest to the verdict for the length of time the case drags on. For example, if your case drags on for a year, then you would receive interest for that entire year.

It’s important that when you file a personal injury claim – you remember that unless it’s based on physical damages, the proceeds will be taxed. This can be EXTREMELY important, in the case of situations where you request the assistance of a lawsuit cash advance company. These companies advance you a portion of your settlement up front, with monthly interest ranging from 8-12%. When you take into account the taxes on your settlement, and the interest + principal on the lawsuit cash advance, you can quickly end up having virtually no “money” from the settlement. It’s important to balance your checkbook, metaphorically speaking, when taking a lawsuit cash advance + having to pay taxes on your settlement.

About The Author

This blog post was written by Joe Powers, a Los Angeles personal injury lawyer, at SchoolMatters.

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