Are Personal Injury Settlements Taxable?

If you or somebody you care about sustained an injury caused by the careless or negligent actions of another individual, company, or entity, then you are likely entitled to various types of compensation for your losses. The process of securing compensation in these situations can be challenging, but it can be done. However, many people wonder whether or not their personal injury settlements are taxable. This is a very important topic, and we are glad that we have the chance to answer this question.

Are Personal Injury Settlements Taxable?

You Always Have to Pay Taxes, Right?

The vast majority of personal injury claims are resolved through settlements with insurance carriers before they even go to trials. However, there are many cases that do need to go to trial to reach a successful resolution. After a settlement is accepted or after a defendant pays the jury award, will the government come after the money?

The good news is that proceeds received from most personal injury claims are not taxable at either the federal or state level. It does not matter whether a case is settled before trial or as the result of a jury verdict. Federal tax law excludes damages resulting from personal physical injuries or illnesses from a taxpayer’s gross income on their taxes. Most states follow suit.

Are There any Exceptions to This Rule?

As with everything in life, there are exceptions to this tax rule. When it comes to personal injuries and taxing the settlements or jury verdict awards, we see that the following situations will end up becoming taxable events:

  • Breach of contract. If your case revolves around a breach of contract, any damages awarded will be taxable. This is true even if you suffer a physical injury or illness as a result of the breach of contract.
  • Punitive damages. Punitive damages are awarded in some personal injury cases when the conduct of the defendant is grossly negligent or intentional. If punitive damages are awarded, they will always be taxable. In some situations, it may be possible to get punitive damages separated into a separate part of the settlement in order to untangle them from the compensable damages that are not taxable.
  • Interest. In most jurisdictions, there are rules that allow interest to be added to a jury verdict award amount for the length of time that the case has been pending. Sometimes, this interest can be substantial depending on how long the case has been ongoing. In these situations, any interest will be taxable.

How Much Compensation is Awarded in an Illinois Personal Injury Case?

If you or somebody you love has been injured due to the actions of another individual or entity, you are likely wondering how much your case is worth. The reality is that no two personal injury cases are exactly alike, and there are several factors that go into determining how much compensation an injury victim will receive. Some of the factors that affect compensation amounts include the severity of the injury, whether or not there was any shared fault for the incident, the level of the victim’s pain and suffering, whether or not the victim can work, and more.

We strongly encourage you to work with a skilled Chicago personal injury attorney who can walk you through this entire process and work with skilled economic and financial experts to properly assess how much the case is worth, and see check if you have any outstanding debt like school loans.