You can initiate a civil lawsuit to collect compensation for your losses if you have been hurt due to someone else’s negligence or intentional wrongdoing. You may be compensated for monetary damages if you win your lawsuit or reach an out-of-court settlement. When you receive compensation, you may ask if your settlement is taxable. After all, you typically receive a big sum from an injury settlement, and the government generally takes a portion when you are paid. To get answers to this and any other questions you may have, click here. 

What is a personal injury settlement? 

Whenever someone do you harm, you have the right to file a claim for compensation to be “made whole” for your losses. You can file a civil lawsuit in court, and if you prove your claim, the court will award you damages. You could also try to reach a settlement. Negotiations for settlement result in the payment of personal injury compensation. Typically, you will negotiate with an insurer representing the person or corporation who injured you, such as auto insurance, homeowner’s insurer, or malpractice insurer. 

The insurer or defendant who injured you will pay you a certain sum of money in exchange for making any additional claims. This sum represents your injury settlement. In most cases, the settlement or the damages granted in a lawsuit compensate you for the following: 

• Medical bills incurred as a result of injuries. 
• Lost wages if you missed work or were unable to work due to injuries. 
• The emotional turmoil and the pain and suffering that your injuries cause. 

Personal injury settlements can range from tens of thousands to millions of dollars. That is why it is important to determine if personal injury settlements are taxable. 

Are personal injury settlements taxable at the federal level? 

The good news is that personal injury settlements are not federally taxable. This means that the IRS will not take any of your money. Since the funds received are supposed to compensate you for losses, the federal government does not tax your settlement money. This is true for both actual economic damages like medical costs and lost wages and non-economic damages like pain and suffering and emotional anguish. 

It is important to point out, however, that pain, suffering, and emotional anguish are not taxable unless there is a physical injury. Economic damages are not taxed since you are merely recouping lost income. In contrast, non-economic damages are not taxed because they are intended to assist in making up for losses for which you cannot receive direct compensation, such as pain and suffering.

Because these are compensatory damages, the government considers you suffered a loss equal to the money you got; hence, your settlement is not taxable income.