It’s tax season and a lot of our clients call to inquire about reporting personal injury awards and settlements on their taxes. As a general rule, most personal injury rewards and settlements are not taxable by federal or state governments. In a typical settlement where you receive only compensatory and general damages for your physical injuries and medical expenses, most of that amount is usually not subject to taxes because that type of settlement or judgment is meant to reimburse you for your out-of-pocket losses.
One caveat to this rule is an injury relating to emotional distress. If your settlement contains an award for damages based on emotional distress you may need to pay taxes for this type of award because emotional distress is not considered a physical injury or physical sickness.
Please note that it’s important to speak with a tax attorney or other tax professional to ensure that you are in compliance with IRS regulations before filing your taxes.