Bodily Injury Settlements: Paying Taxes on Your Injury Compensation...

People who win bodily injury settlements rarely get to keep the whole amount. How much of your personal injury compensation will you be able to keep?

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

Like so much in the personal injury claim process, the rules vary from state to state. In most cases the government, State or Federal, can't take taxes out of your settlement award.

The bottom line on most tax issues is that the money awarded in bodily injury settlements 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 settlement mentions certain losses specifically. For instance, if it's clear that some of your compensation was for lost income, then that's taxable.

It's often 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 points left open 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 bodily injury settlements. Since so much of it is pain and suffering compensation, and the specifics about the rest are so hard to interpret, it's not usually worth investigating.