Are Personal Injury Settlements Taxable?When you’re injured in an accident or incident that was not your fault, filing a personal injury claim is your legal right for securing compensation for your injuries and losses. Often, an injury requires medical attention and time off of work to heal. This means loss of paycheck, and depending on the severity of your condition, this could mean no money coming into your household for days, weeks, or months. Financial compensation from a personal injury action is often a victim’s only recourse.

However, many of our clients tell us at our consultations they are wary of seeking large settlements for fear of the IRS coming after them. The purpose of today’s blog is to set your mind at ease about personal injury settlements: when you are awarded an insurance settlement for a physical injury, you do not owe the IRS a penny.

Physical injuries include things like spinal injuries, head injuries, burn injuries, and anything that affects your body. The court typically defines physical injuries as conditions that cause a victim to incur financial difficulties stemming from medical bills, lost wages, and related emotional injuries, as well as attorney fees. These physical injuries can stem from vehicle accidents, medical malpractice, dangerous property, and other conditions caused by negligence.

The exceptions to the rule when it comes to taxing injury awards

As stated, most personal injury claim settlements are non-taxable in Mississippi.

However, the IRS does note that not all of the compensation a personal injury plaintiff receives is exempt from taxes. For example, say you are awarded punitive damages. Punitive damages are typically awarded at the court’s discretion and are designed to punish the defendant. They are often significantly higher than the original settlement. Punitive damages are also taxable; however, your original compensatory damages will not be taxed.

Financial compensation awarded for non-physical injuries, like emotional pain or discrimination, is also taxable under the IRS. However, under some circumstances, if other parts of your claim contain physical injury, your emotional distress claim may end up being non-taxable. However, only an experienced Southaven attorney knows how to structure a personal injury claim to minimize tax implications as much as possible.

Other taxable damages include property damage and lost wages (the typical employment taxes you would pay anyway). Additionally, if you added itemized deductions to your taxes in previous years for your medical costs, you will owe taxes on the medical compensation for your settlement. However, if you did not take those deductions, you can take the medical compensation tax-free.

The majority of personal injury settlements in Mississippi are tax-free. It is important to work with attorneys who can design and strategize your case for the best results possible. To schedule a free consultation, please call Taylor Jones Taylor at 662.342.1300 or fill out our contact form to schedule a free consultation today. Serving clients in Southaven, Olive Branch, Hernando, and throughout Mississippi.