Are You Expected to Pay Taxes on Your Injury Settlement?

So you've finally received your injury settlement, but now you need to know how much of it you actually get to keep. What amount of it's yours and what amount of it's going to be paid out?

The last section looked at liens, which is the more common way for a chunk of your money to be used up. The other way you can lose some of your injury settlement is to taxes. Don’t panic though, the government can’t really take too much of your injury settlement. Usually they can’t take anything.

Like other things we've looked at, the rules vary from state to state. In most cases the government, State or Federal, can’t take taxes out of your injury settlement money. The bottom line on most tax issues is that the money you get from your injury settlement is for pain and suffering. And money you get for pain and suffering can hardly be construed as income.

The exception to this is when the injury settlement mentions certain losses specifically. For instance, if it's clear that some of the settlement was for lost income, then that's taxable. Usually it's impossible to distinguish what is actually covered in a lump sum insurance settlement, but sometimes those points are made clear.

Beyond the pain and suffering part of your settlement, there's obviously a portion that relates directly to your medical bills. If those expenses were paid out of pocket, then you might have deducted them as a medical expense on your income tax. If that's the case, then it's no longer an expense and you may be required to pay the taxes you missed because of the deduction.

Like everything to do with taxes, there are a lot of things left to interpretation. If you are truly unsure of what to do, seek the advice of a tax specialist.

Otherwise, realize that most auditors won’t likely get involved with a debate about injury settlements. Since so much of it is a pain and suffering settlement, and the specifics about the rest are so hard to interpret, it isn’t usually worth investigating.

Learn More About What to Do After Your Settlement:

Getting Cash for Your Settlement - The Final Steps

What if the Money from the Settlement Agreement Doesn't Come?

Being Prepared for Liens on Your Personal Injury Settlement

Repaying Liens to Your Own Health Care Coverage

Are You Expected to Pay Taxes on Your Injury Settlement?


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