Are Pain and Suffering Settlements Taxable?

are pain and suffering settlements taxable

A common question in personal injury cases is: are pain and suffering settlements taxable? The answer depends on the individual's circumstances. A settlement for physical pain and suffering is not taxable, but an award for emotional pain and suffering is. IRS lumps these together with medical expenses, but they are separate from each other. An award for emotional pain and suffering must be separated from medical expenses, since it can be a result of physical injuries.

If you are awarded a personal injury jury award or settlement, the money you receive for treatment of bodily injuries is exempt from federal taxation. However, you may have to pay taxes on other forms of compensation. Punitive damages are generally taxable, since they are awarded as punishment to defendants. Punitive damages are intended to serve as a deterrent to similar behavior. Fortunately, the IRS is working on ways to make this rule more fair and more consistent.

A taxable portion of a personal injury settlement depends on whether you claim medical expenses as a tax deduction. For example, if you sue your employer for lost wages, you can claim that amount on your tax return. However, if you sue for compensation for pain and suffering, this money will be considered taxable income. This is because the IRS considers these settlements to be "normal" income, which means it counts as wages for your regular employment.

The answer to the question of whether a pain and suffering settlement is taxable depends on several factors, including the nature of the personal injury, the amount of compensation awarded, and whether you won't receive a jury award. A personal injury settlement may also include punitive damages or compensatory damages. This will vary, depending on the details of your case, but in most cases, personal injury settlements are not taxable. If you are interested in learning more about how to maximize your claim, contact an attorney for a free case evaluation.