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Personal Injury Settlements and Taxes

Updated on April 11, 2012

There are some people that suffer through personal injuries and it seems like the pain and anguish never end.  Physical problems develop months after the initial accident.  Time off from work leads to a sufficient decrease in wages.  Finally, the Boston personal injury lawyer announces that the court case is settled and the injured party is awarded a settlement.  What could be worse than to have to pay taxes on the settlement?

Personal Injury Awards

Any money that is paid as a personal injury award is NOT taxable.  The IRS tax code has recognized that people who are victims of serious personal injury typically lose money through the situation.  Due to the time off from work and additional medical expenses most people end up with a net loss.  Thus, any money that is deemed a personal injury settlement is not considered a taxable item by the IRS.

Punitive Damages

Punitive damages are a completely different story.  The original intent of punitive damages was designed to punish the defendant.  The judges and lawyers reasoned that if one company willfully acted in an unfavorable manner that resulted in the harm of another person, then other companies might follow their lead.  In order to persuade companies from acting in such manners the punitive damage was developed.  The amount is usually significant so that it is a real cost to the defendant. 

This type of award is taxable by the IRS.  Since punitive damage does not represent money that the injured party loss, it is considered income to the injured party.  The tax that must be paid on this is determined by the normal guidelines set forth by the IRS.  A tax accountant can help answer any questions about how much tax will be paid on this type of settlement.

Do We Pay Taxes on Personal Injury Settlements?

Back Wages Awards

There are some people that receive back wages awards in addition to the personal injury settlement.  Since this is basically a case where a person is being paid the same amount they would have earned while working on the job, then it is logical that these awards are also taxable. 

Awards for Non-Physical Injury

Any monetary amount that is given to a person for any non-physical injury is also taxable.  This would cover various types of awards such as emotional distress, discrimination, or breach of contract.  

IRS Definitions of Tax Free Award

The reasoning used by the IRS to classify and award as a tax free event has two criteria:

  1. The person must suffer physically, either by an injury or sickness.
  2. The sickness or injury must be caused by a wrongful action.

If you have any questions about pending litigation on your behalf you should speak to your Boston personal injury attorney to find out what type of award you may expect to receive.

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