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,