At Zarzaur Law, we do get a lot of clients asking at the end of their case if their personal injury compensation is taxable. Normally, the compensation you receive for the physical pain and suffering associated with your car accident (or other type of accident that caused personal injury) and attendant injuries is not taxable. This compensation is considered to align with your compensation for medical expenses and, therefore, avoid tax liability. These personal injury awards are reportable, but not taxable.
While we are lawyers and not accountants, we always advise our clients to seek the advice of a tax professional with questions in regards to income from a settlement.
Below is some basic information to help answer this question.
Personal Injury Damages That Can Be Compensated For And Not Taxable Include:
Physical and mental pain and suffering
Permanent injuries and impairments
Handling Your Medical Expenses
According to an article by Picnic Tax, the tax treatment of settlements received for an injury depends on how you handle your medical expenses. If you did not deduct any medical expenses related to your physical injury on previous tax returns, the settlement money you receive is not taxable. The IRS won’t allow you to double-dip, however. If you deducted medical expenses related to your injury during the previous year, part of your settlement is taxable.
Let’s say you were injured in a car accident in 2020. As a result of the accident, you required surgery that cost $30,000. You paid the hospital bill in 2020 and deducted $30,000 from your income taxes as a medical expense. In 2021, the lawsuit related to your accident was settled, and you received $50,000 for your physical injuries to cover both past and potential future medical expenses. In this case, $30,000 of your settlement is taxable and $20,000 isn’t.
Emotional distress settlements related to your physical injuries aren’t taxable. In the car accident example, if you were unable to work for several months after your accident and had subsequent surgery, you were also unable to enjoy life as you normally would. This resulted in severe depression and emotional distress. In this case, your emotional distress settlement isn’t taxable because the distress was the direct result of your injuries.
However, compensation for emotional distress only, without a physical injury, may be taxable.
Questions To Ask A Tax Professional About Your Injury Settlement
If you are concerned that your Florida injury settlement could have a negative effect on your finances come tax time.
Ask questions such as:
- What type of information and documentation do you need from me?
- Is any of the money I received taxable?
- How does the IRS determine what is and isn’t taxable?
- What impact does the injury settlement have on other taxes that I may have to pay?
A Florida tax professional can answer these questions, among others, to ensure that you’re making safe financial decisions.
Joe Zarzaur is a Board Certified Civil Trial Attorney whose firm is dedicated to promoting community safety since 2007. ZARZAUR LAW’S AREAS OF PRACTICE: Serious Personal Injury, Product Defect, Auto Accidents, Cycling Accidents, Motor Vehicle Accidents, Products Liability, Wrongful Death, Community Safety, Boat and Jet Ski Accidents, Slip and Fall Injuries, and more.
Licensed in Alabama and Florida.
If you’ve been in an accident, it’s important that you don’t make any rash decisions. Put yourself in the best possible position to receive the justice you deserve. It is also important to consult with a Board-Certified Trial Lawyer who has the knowledge and experience to help you.
We know accidents can be stressful and want to make the process as easy as possible for you. Call Zarzaur Law, P.A. today at (855) Hire-Joe, or by requesting a free case review through our website.