If you have received a court ordered award or settlement offer in your personal injury case, it’s likely that the majority of the money will be non-taxable. Your award may be divided into different categories, including:

• Personal injury or sickness payments
• Emotional distress related to your injury
• Medical expense reimbursement
• Payment for lost wages
• Punitive damages

While payments related to your actual physical injury are not taxable, payments to harassment, discrimination or punitive damages are taxed by the IRS. Your personal injury attorney can help you determine which parts are taxable by the IRS, and to understand your settlement; you can find an explanation of each part of your settlement and its taxability outlined below.

Non-Taxable Payments

Your personal injury award may be broken into several parts, and include payment for your actual injuries and distress, missed work and medical expenses; these portions are generally not taxable by the Federal government. Your personal injury attorney can help you go over your settlement or award and determine which parts are taxable and which are not.

Personal Injury or Sickness Payments

If you receive an award or settlement from a personal injury caused by someone else, then the payments you receive are not taxable by the Federal government. According to the Internal Revenue Service, it won’t matter if the money you receive comes to you as part of an out of court settlement or is awarded to you by the court; either way it is not taxable by the IRS. You could receive a lump sum or installments; the way you receive payment does not impact its taxability. If you are also receiving compensation for emotional distress related to your sickness or injury, those payments are also non-taxable; the IRS considers the distress to be part of the original sickness or injury.

Money Received for Medical Expenses

If your settlement includes repayment of medical expenses, those amounts are non-taxable as well. If you have claimed a medical expense deduction in the past and then are reimbursed for your costs, then you’ll need to recapture those costs on your next tax return.

Payments for Lost Wages

If you’ve received payment for lost wages after your injury or illness, then that amount is not subject to taxation by the IRS, even if those wages are normally taxable.

The IRS is going to want some of the money, right?

There are a few taxable categories, fortunately these will likely not make up the bulk of your settlement, but you should know what to expect. The following payments are generally considered to be taxable by the IRS and your attorney can help you determine exactly which parts of your settlement fall into these categories.

Payments for Legal Injuries

Harassment, discrimination, invasion of privacy and wrongful termination can be included in a personal injury suit but the amount you receive specifically for these injuries is taxable.

Emotional Distress Not Caused by Physical Injury

If you have been awarded a settlement that includes emotional distress that is not directly related to your personal injury or sickness, then that portion of the settlement could be taxed.

Punitive Damages

If you’ve also been awarded punitive damages, then this settlement amount is usually taxable, according to the IRS; there are a few exceptions related to wrongful death cases. These general guidelines should give you an idea of what to expect after your settlement; your personal injury attorney can provide more specifics as needed.