Should You Anticipate Taxation Of An Injury Settlement?

If you have received compensation as part of a personal injury settlement, you may be wondering if you’ll be required to pay taxes on the settlement award. In most cases, there is no taxation of an injury settlement, but there are, of course, exceptions to this rule.

When Compensation Is Not Taxable

In general, personal injury settlement compensation is not taxed by the state or federal governments. This is true whether the case was settled prior to going to court or if it was settled in court. The IRS specifically exempts settlements received for personal injuries or physical sickness from taxation. Most personal injury awards compensate the victim for things like lost wages, medical expenses, pain and suffering, and attorneys’ fees. None of these are taxable so long as they result from a physical injury or sickness.

When To Expect Taxation Of An Injury Settlement

As with most aspects of the tax law, there are exceptions to this general rule. For example, you may be taxed:

• On Damages. Damages related to a breach of contract if that breach caused your injury and the breach is the basis of your lawsuit.
• On Punitive Damages. Punitive damages are always taxable. If you are recovering punitive damages our Madison, WI law firm would ask the judge to separate the verdict into punitive and compensatory damages so you can provide that information to the IRS and avoid taxation on the compensatory damages.
• On Interest From The Judgment.

Consult Our Madison, WI Law Firm To Make Sure You Are Not Unduly Taxed On Personal Injury Settlements

The best way to avoid undue taxation is to ask your attorney to have the settlement award broken down by type in the settlement agreement. By having the dollar amounts and what the dollars were awarded for in writing, there is much less chance of the IRS mistakenly taxing you on a settlement resulting from a personal injury.

If you have additional questions or concerns about injury settlements, contact the Eisenberg Law Offices Madison, WI law firm at 608-256-8356 or online.