Are personal injury settlements taxable?

November 23, 2005

From:  Pamela
Date:  Fri, 04 Nov 2005

A friend of mine received a settlement from a lawsuit relating to an injury to her foot and leg at work.

The settlement was $75,000. The attorney will receive his fees, and Medicaid will be reimbursed for about $3,000.

Is the award taxable? Her attorney never mentioned anything to her about taxes.

I know there are laws excluding settlements and awards for personal injuries. Does she have to figure out how much was for being out of work, doctor bills, etc.? How can she do this?

Answer

Date:  Mon, 07 Nov 2005

Hello Pamela,

The education and background of personal injury lawyers usually isn't focused on tax law. They have a different area of practice. Meanwhile, the claims filed and settlement agreement can have major tax consequences.

There is a tax concept called "the origin of the claim". If the settlement is for a tax-exempt matter, such as physical injury, the settlement received should be exempt from tax. Punitive damages are not tax exempt. An amount paid from physical injury that is exempt can go beyond medical expenses, because of the loss of potential earning power and so forth as a result of the physical injury.

I suggest that your friend meet with a tax consultant to discuss the details of his or her case and determine the tax consequences. The entire award might be tax exempt.

Good luck!
Mike Gray

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