Tax on Compensation Awards 

Posted on Saturday, June 13th, 2020 at 6:17 am    

After receiving a personal injury settlement most people assume all the monies are theirs. And focus on resting and relaxing from the long, hard process they went through to get compensation. However, before you can sit down and enjoy the money there may be an issue of tax to consider. This article will discuss whether or not you have to pay tax on a personal injury settlement.

The need to disclose personal injury settlements for tax purposes depends on the circumstances of the case itself. Another factor is how the monetary awards will affect income for the victim. The compensation may happen through different payment, paying off bills or have different elements that could change your income.

Taxing Compensation Awards

The Internal Revenue Service (IRS) generally does not require taxes on a personal injury claims. This is when these monies provide income for the following:

  • back pay,
  • emotional distress situations
  • when paying your lawyer.
  • injuries,
  • sickness,
  • impairment and
  • disability from injuries in the accident

The victim of the accident may be required to file a tax return and itemize deductions. This is done for medical costs for treatment or health conditions. Future tax returns may also demand certain itemized sections, filled out to cover all nontaxable income for the settlement. However, the person usually should not include the settlement as income when itemizing the deductions.

Injury Awards and Tax

When the account for physical injuries or ailments from the accident is for previous years, the settlement amount is included. For medical treatment and bills that the person deducted in prior years which benefits tax, future tax returns may be filled when compensation pays. Emotional trauma or mental distress compensation not due to the physical injuries are part of their income. This applies if the cause is from the stress caused by the incident.

A personal injury settlement tax is related to the type of damages and how the person uses the compensation awards in their life. With lost wages or profits from a business transaction, the income from these items is usually taxable. This is because the IRS would originally receive the tax portion of these monies. The same applies to business profits, the income and profits received must be taxed.

Speak to a personal injury attorney to explain taxing of your settlement.


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