The following article is intended for informational purposes only and should not be construed as financial or tax advice. When facing any type of potential tax exposure, you should always seek the advice of a qualified tax professional regarding your individual situation.

If you’ve been involved in a personal injury case and are expecting a settlement or jury award, you may be wondering whether the amount you receive will be subject to taxes. The taxability of personal injury settlements depends on several factors, primarily the type of compensation involved in the claim.

In general, compensation received from a personal injury case is viewed as non-taxable. This includes money intended to compensate for medical expenses and property damage, as these are seen as reimbursements for financial losses and not considered part of a victim’s income.

However, there are exceptions to this rule. Certain portions of a personal injury award may be subject to taxes, including the presence of punitive damages. Unlike compensatory damages, which aim to reimburse victims for medical treatment, property damage, pain and suffering, etc., punitive damages are awarded to victims for the at-fault party’s willful and egregious conduct. These damages are designed as punishment for wrongdoing and are subject to taxation. Punitive damage awards can be high, thereby creating a significant tax liability for the award recipient(s).

Fortunately, settlements for physical injuries are not considered taxable income in Indiana or any other state for that matter. Whether the settlement arises from auto accidents, truck accidents, slips and falls, or any other physical injury, you generally should not owe the IRS or the state any taxes on the money you receive.

Determining whether a personal injury settlement is taxable revolves around defining what constitutes a “physical injury.” This includes injuries or illnesses that lead to lost wages, medical bills, emotional distress, pain and suffering, loss of consortium, and even attorney fees. Physical injuries cover a wide range of situations, from physical accidents to medical malpractice to exposure to viruses or bacteria resulting in infectious disease.

It’s important to note that while punitive damages are generally taxed and compensatory damages are not, there might be exceptions depending on the nature of the claim and an individual’s unique circumstances. For example, existing state/federal tax liens or back taxes that are present at the time of a settlement may impact how much a victim ultimately receives. Seeking advice from a qualified CPA or tax professional is highly recommended to fully understand the tax implications of a specific case.

Having a knowledgeable law firm on your side during the settlement process is crucial to ensure that the different types of damages are properly defined. Insurance companies may not consider the tax implications of the settlement, leaving you with an unexpected tax burden. An experienced personal injury attorney can help maximize your settlement and protect your rightful compensation, giving you peace of mind during this challenging time.

Contact Hurst Limontes today to learn more.