If you have been involved in a personal injury lawsuit and have received a settlement in 2022, you may be wondering if the damages you recovered are subject to being taxed. Your liability depends on the type of compensation you received; some damages may be taxed, and others are exempt.  As tax day approaches, it’s time to start figuring out what tax liabilities you may be facing.

Non-Taxable Compensation

In general, damages that are awarded to compensate for a personal injury are not considered taxable income under both federal and state laws. Compensatory damages are intended to make you financially whole again after suffering from a personal injury due to a car accident, slip-and-fall, or another injury due to another party’s negligence; so taxing them doesn’t make sense. This includes economic and non-economic damages awarded for:

  • Medical expenses – Cost of treatment for injuries (unless used as a prior tax deduction).
  • Lost wages – Lost income due to inability to perform or injury recovery
  • Pain and suffering – Emotional distress as a result of an injury

The original settlement amount is not taxable. However, any interest earned on a settlement or award is considered taxable income. Oftentimes, personal injury settlements can reach into the millions of dollars so it’s important to keep track of the types of compensation you receive.

Taxable Compensation

On the other hand, punitive damages, which are damages awarded to punish the defendant for particularly egregious negligent conduct, are considered taxable income. These damages are not intended to cover the costs of your injury and are instead treated as income. That’s why they are typically awarded on top of the non-taxable damages mentioned earlier.

No matter the type of compensation you receive from your settlement, it’s imperative to keep a financial record of what you receive. When the time comes to file, you may be required to report all income from a settlement, even if it’s not taxable.

If You’re Not Sure, Consult a Professional

When it comes to personal injury lawsuits, it’s always best to consult with a tax professional or an attorney familiar with personal injury law to understand the tax implications of your settlement. They can provide guidance on how to properly report your settlement on your taxes and help you understand what is and isn’t taxable.

A personal injury firm like Miller & Hine in St. Louis are experienced in structuring settlements to minimize their tax impact. They can also provide guidance on how to handle settlement proceeds to maximize the compensation you receive from your injury.