When a person is injured in an accident that was not their fault, they are entitled to financial compensation for economic losses, such as the cost of the medical care required to treat their injuries, lost wages, and out-of-pocket expenses. They are also entitled to compensation for non-economic damages like pain and suffering, emotional distress, and loss of enjoyment of life. A common question that arises during the negotiation and settlement of a personal injury claim is, “Is my personal injury settlement taxable?”

Understanding whether your injury settlement is taxable is important to help optimize your financial situation and avoid unexpected tax liabilities. The personal injury attorneys at Robenalt Law have decades of experience guiding clients through the legal and financial issues that arise after a personal injury. We can answer your questions and provide expert legal advice as we guide you through this difficult time and protect your financial future.

Contact Robenalt Law today to schedule a confidential appointment to discuss your situation and how we can help.

What Is a Personal Injury Settlement?

A settlement is an agreement between two parties that resolves a legal dispute without a trial. Instead of asking a judge or jury to decide the matter, the parties agree to an amount of money that will compensate the injured person for their losses.

Personal injury settlements typically involve legal claims for economic and non-economic losses.

• Economic losses often include compensation for hospital bills, physical therapy and rehabilitation, the cost of future medical care, prescription medications, lost wages, loss of earning capacity, property damage, and other out-of-pocket costs.
• Non-economic losses refer to the intangible harms a person suffers because of an accident, such as pain and suffering, emotional distress, loss of enjoyment of life, and loss of consortium.

Do You Have to Claim Settlement Money on Your Taxes?

In most cases, you will not be taxed on money you received in a personal injury settlement. However, whether you need to pay taxes on an injury settlement can depend on what the money was for.

Under Internal Revenue Code §104(a)(2), a taxpayer can exclude from their 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 injuries or physical sickness.”

The IRS has interpreted “Damages received on account of personal physical injuries or physical sickness” to mean an amount received (other than workers' compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution.

Understanding the Taxability of Personal Injury Settlements

Ohio generally follows the federal tax guidelines regarding the taxability of injury settlements. The IRS distinguishes between compensation received due to physical injuries and sickness from compensation that might be regarded as taxable income, such as lost wages.

• Money received for physical injuries and as compensation for medical expenses is non-taxable. This settlement money is intended to make a victim whole after an injury, not to serve as income.
• Financial awards for non-economic losses like pain and suffering, emotional distress, loss of enjoyment of life, and loss of consortium are also non-taxable.
• Most personal injury settlements include a financial award for medical expenses that were already paid. These amounts are also generally excluded from taxable income, unless they were previously deducted on the injured person’s tax return. If you already deducted these medical expenses in a prior tax year and later received a financial award, this could change your tax situation.
• The portion of a settlement that covers lost wages could be taxable. Because this portion of the settlement replaces lost income, it would count as income and could be taxed.

Your Attorney Can Help You Understand Taxes on Settlement

Understanding the tax implications of a personal injury settlement can be challenging. Many settlements include compensation for different types of losses, and each item can have its own unique tax implications.

Our attorneys can guide you through the tax consequences of a personal injury settlement and work to minimize the tax liability of your personal injury settlement.

The Personal Injury Attorneys at Robenalt Law Can Help

If you were injured because someone else was negligent, you deserve to be compensated. The personal injury attorneys at Robenalt Law can analyze your situation, explain your options, and fight for the compensation you deserve.

Contact Robenalt Law Today

Robenalt Law has offices in Cleveland and Columbus, and handles personal injury claims throughout Ohio and nationwide.

Call our Cleveland office at (216) 223-7535 or our Columbus office at (614) 695-3800 or contact us online to schedule a free, confidential, no-obligation appointment to discuss your situation and how we can help.