At the end of every Personal Injury case I get to give almost all of my clients a pleasant and surprising response to the question: What is the Tax Rate on my Personal Injury Settlement or Verdict? The Answer is usually ZERO!
Personal Injury Settlements and Verdicts are Not Income – Settlements and Verdicts are Compensation to Make Up for Injuries
The IRS and State Governments, like the Pennsylvania Department of Revenue, tax all forms of Income. PA has a fixed rate and the IRS has a progressive rate based upon income.
However, Personal Injury Settlements and Verdicts are not considered to be Income and, consequently, are not Taxable.
Personal Injury claims based upon physical injuries are supposed to provide compensation to victims to make up for harms and losses including medical bills, lost income, physical and emotional pain and suffering, disability and scarring and disfigurement.
The IRS considers this money as compensation for harm, not Income, so tax is not due.
Beware of Exceptions that Can make Settlements and Awards Taxable
Despite the general rule that Personal Injury claims are not taxable, there are several possible exceptions that can make Injury Settlements or Verdicts taxable including:
- Settlements or Verdicts not involving Personal Injury or Sickness
- An additional award of Punitive Damages
- Wrongful Death Cases
It’s important to have an Experienced Personal Injury Lawyer to ensure that you know whether or not there will be tax consequences at the end of your Personal Injury case.