Many personal injury cases end in a cash settlement. You’ll receive the settlement money. But then what happens? Do the state and federal tax men and women get a cut? I’ll answer that in this blog post.
The General Rule
Not all settlements are taxable. In fact, the general rule is that settlements for personal injury claims are not normally taxable by the state or the federal government. (By the way, the same is true about damages awards that are given by a judge or jury at the conclusion of a trial.) Normally, personal injury settlements are used to compensate an individual for expenses like future medical bills. Payment for future medical bills that is taxed would result in a plaintiff not being able to afford the future medical bills with the settlement money. That wouldn’t be very fair.
There are some exceptions to the general rule, to the generally non-tax-exempt nature of personal injury settlements. These exceptions involve
- Punitive damages
- Emotional distress or mental anguish without accompanying physical injury.
To make sure that as little of your settlement as possible is not taxed, it is a good idea to hire, for your entire case, an experienced personal injury lawyer.