Could You Be Required To Pay Taxes On A Personal Injury Settlement?

This is the general rule: The money used to compensate an accident victim with a physical injury is not taxable.

Exceptions to that general rule

The victim’s lawsuit was based on the fact that a breach of contract had caused the reported injury. Any money received by a plaintiff that has been linked to an injury or sickness that had been caused by another person’s breaching of a contract can be taxed.

That exception helps to explain the fact that insurance companies view an exaggerated claim or an underrepresented one as a red flag. Both of them entail the breaching of a contract, in order to get compensated for property loss, or for bodily injury.

Punitive damages are subject to taxation. A personal injury lawyer in Georgetown should make sure that the verdict for a given client’s case separates the compensatory and the punitive damages.

Sometimes a personal injury attorney can get a judge to go along with the addition of one or more compensatory damages, in exchange for removal of the punitive damages. That would free the client from the need to pay any tax.

The interest on a judgment is taxable. That interest gets added to the amount of money mentioned in the verdict, while the associated case remains pending, usually due to an appeal.

Note that the absence of a tax applies only to compensation for a physical injury.

Money won in a case where plaintiff has claimed an emotional injury can be taxed.

—That could be a case where plaintiff has alleged creation of a harmful amount of distress.
—That could be a case where plaintiff has alleged discrimination by the responsible party.

How do rules about what can be taxed reflect the purpose of the legal process that follows submission of a personal injury claim?

The legal system created that specific process in an effort to help accident victims get back to the point at which they had been, financially, prior to the injury-linked accident.

The legal system focuses on the value of the victim’s losses. That value is clearest for the losses that have resulted from a physical injury. Although the insurance companies do estimate the extent of damage from pain and suffering, the government has not chosen to recognize those estimated losses.

Consequently, the legal system has chosen to consider only the amount of money spent on the treatment of an injury, or on adaptations in a home or business, for the victims of catastrophic injuries. Hence, the compensation offered to the same victims does not get taxed. As a result, the victims’ financial position can be restored to a point that resembles their financial position prior to the accident’s occurrence.

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