It seems rational to think that if you’re in an accident and awarded a verdict or settlement amount, you would simply take the money and go on.
Unfortunately, a percentage of it may be subject to taxation. So, what part of your personal injury award is taxable?
The short answer is: it depends.
Here’s the longer answer:
Physical injury awards are NOT taxable
While this statement is wholly true, it’s not always easy to prove what injuries are solely physical.
This quote from a recent Forbes article explains just how complex and confusing personal injury taxation can get:
“If you make claims for emotional distress, your damages are taxable. In contrast, if you claim that the defendant caused you to become physically sick, those damages should be tax free. Yet, if it is emotional distress that causes you to become physically sick, even that physical sickness will not spell tax-free damages. However, if you are physically sick or physically injured, and your sickness or injury produces emotional distress too, those emotional distress damages should be tax free.”
Money received to cover medical bills and lost wages from a physical injury are always tax free. Generally speaking, any money received for pain and suffering is also tax free.
Emotional injury or distress damages ARE taxable
If your personal injury claim centers around emotional damage or distress, any awarded amount would be taxable. For example, if you were suing an employer for discrimination and won the trial or settlement, your verdict or settlement amount would be taxed.
Punitive damages ARE taxable
Punitive damages are sometimes (though rarely) awarded to a victim of a personal injury accident to punish the person at fault for their negligence. If they are part of your personal injury settlement, punitive damages are considered income by the IRS and therefore taxable.
Interest accrued on settlement money or an unpaid verdict IS taxable
If any money that you receive from a verdict or settlement accrues interest either in your bank account or an investment account, the interest is subject to being taxed. Also, if you don’t receive your award money immediately after your settlement or trial, that amount would gain interest until you did receive it. However much of that interest ends up being taxable as well.
Since it can be extremely confusing to separate the taxable from the non-taxable in a personal injury award, we recommend hiring an experienced Tennessee personal injury attorney to ensure you pay as little out of your settlement back to the IRS as possible (while still following the law).