Are Settlements in Personal Injury Cases Taxable?

 Ever wonder: “If I am injured in an accident or slip and fall, and receive compensation for those injuries, do I pay taxes on the money I receive?”  Simple answer: “most likely – no.”
The Internal Revenue Service (IRS) addresses the issue of recovery in personal injury actions and taxation in 26 CFR 1.104-1 – Compensation for injuries or sickness:
“(c) Damages received on account of personal physical injuries or physical sickness — (1) In general.  Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.  Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2)…”
So, what does this mean?  If you are injured in an accident or slip and fall (in fact, any personal injury case where you sustain physical injuries and/or emotional distress), any recovery you receive to compensate you for your medical bills, out-of-pocket expenses and emotional distress, are non-taxable.
However, any recovery you receive to compensate you for loss of income or wages would be taxable because your original income would have been taxable had you not been injured and the compensation you receive for lost income is intended to replace the income you lost.
In the majority of personal injury cases, payment is made for “compensatory damages” and “general damages.” Compensatory damages reimburse the injured party for medical expenses and out of pocket expenses, while general damages reimburse the injured party for pain and suffering.  Under these circumstances, recovery would be non-taxable.
Please keep in mind that personal injury attorneys are not tax advisors.  Additionally, tax laws may change.  Hence, it is important to consult with your own tax advisor on this issue.  Only by discussing this issue with an expert can you be confident that you are receiving the most accurate and current tax information.
For more information, please call The Mason Law Firm at 661-476-5678 or email mason@mrscvlaw.com.