The Rules Surrounding Taxes On Personal Injury Compensation Awards

You are thinking about hiring a personal injury attorney to help you negotiate your claim for compensation after an injury you sustained in an accident. It'll be nice for you to finally have some money to pay the bills you've missed since being out of work. One thing that crossed your mind, however, is whether you'll need to pay tax on any money awarded to you as part of your personal injury compensation. The good news (for the most part) is, no, you won't need to pay taxes on any compensation you receive.

Personal Injury Compensation is Not Taxable

Generally speaking, personal injury compensation is not taxable under both state and federal law. It doesn't matter if you went to trial and won your case, or if you settled out of court.

Personal injury compensation is meant to compensate you for damages such as emotional distress, pain and suffering, loss of consortium, lost wages and medical bills.

Exceptions to the Rule

While we said generally speaking personal injury compensation is not taxable, there are exceptions to the rule. If your injury sustained was the result of a breach of contract, and that breach of contract is the basis of your personal injury lawsuit, any compensation you're awarded will be taxed.

Also taxable are punitive damages. If this is the case, your attorney usually asks the punitive damages and compensatory damages to be split, so you can prove to the IRS that part of your award that is not taxable.

For more information on personal injury awards and compensation, contact us.