If you or a family member has been injured in an accident and received compensation, you may be wondering if that settlement is taxable income.
There are typically several types of compensation you may seek in a personal injury lawsuit. They include:
- Reimbursement For Property Damage – Damages to your car for example
- Reimbursement For Lost Wages – If your injury prevented you from working
- Reimbursement For Medical Costs – Medical bills and treatment costs
- Pain and Suffering Damages – Noneconomic damages
- Punitive Damages – Payment intended to punish the defendant for their actions
If your car or other property was damaged, and you were compensated for those damages, this money is not taxable since it is not considered income. This is regardless of whether the payment was from an insurance company or directly from the defendant.
Conversely, reimbursement for lost wages due to your accident is generally taxed since those are essentially wages paid for the time you could not work.
For damages paid for physical injury, the Tax code states and specifically exempts from gross income, “the amount of any damages (other than punitive damages) received (whether by suitor agreement and whether as lump sum or as periodic payments) on account of personal physical injuries or physical sickness.” This means that payments made for noneconomic damages and physical injury are generally tax exempt.
For punitive damages meant to punish the defendant due to their actions, these payments are typically taxable as income.