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Lawsuit Settlements and Taxes

Lawsuit Settlements and Taxes

When you suffer an injury in an accident due to someone’s negligence, you can often file a lawsuit for damages. If this lawsuit is successful, you may receive compensation in the form of a settlement. But are these lawsuit settlements taxable?  Sometimes, you will have to pay taxes on portions of your lawsuit settlement. And other times, you will get an injury claim settlement completely tax-free. Take a look at what factors can determine whether you will need to pay taxes on your settlement.


Are Lawsuit Settlements Taxable by the Federal Government?


The good news is that the IRS mostly doesn’t tax lawsuit settlements. These settlements serve to compensate people for losses. So, the federal government doesn’t consider that a form of income.

This means that you will not have to pay taxes on settlements for:

  • Medical bills due to physical injuries
  • Lost wages resulting from an injury
  • Emotional distress or pain and suffering caused by physical injuries
  • Any other economic damages

However, this doesn’t represent every type of compensation you might receive from a lawsuit settlement.

Also Read: How Much to Expect from Your Birth Injury Lawsuit Settlement

Portions of a Settlement That the Federal Government Taxes


In general, there are two main portions of a settlement that the federal government will tax. The first portion is emotional distress that is not caused by physical injury. For example, if a defective product lights your home on fire, you might develop a fear of fire. Compensation for therapy for this phobia would be taxable.

The second type of compensation the federal government can tax is punitive damages. This is because punitive damages don’t replace a loss. Instead, they aim to punish the negligent party. Thus, you must pay taxes on this money.

Are Lawsuit Settlements Taxable by State Governments?


Lawsuit Settlements

Typically, state governments follow the lead of the federal government regarding taxing settlements. But this isn’t always the case. Your lawyer can tell you whether your state taxes settlements.

Wrongful Death


Both the federal government and most states treat wrongful death the same as personal injury for taxation. However, some portions of a wrongful death settlement could potentially be subject to estate taxes. This is another case where you should consult with your lawyer before doing anything with the money you get.

Also Read: Taxi Accident Lawyer

Contact a Seasoned Personal Injury Lawyer Today


At The Joel Bieber Firm, we fight to help you get and keep as much money as possible. Our team can make sure you know exactly what to expect in your case. Contact our law firm to speak to a skilled attorney today.

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