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  • Reuland Law, LLC

Taxes and Personal Injury Recoveries.

It's tax day! Clients often wonder, Is my personal injury lawsuit recovery subject to income taxes? This post explores the answer.

Federal Income Tax (photo credit to Nick Youngson CC BY-SA 3.0)

Recovery of what's lost is not new income.

Personal injury lawsuits can result in substantial settlements or verdicts for plaintiffs who suffer harm as a result of another party's negligence. Generally speaking, damages awarded in personal injury lawsuits are not taxable as income under federal tax law. The IRS considers compensation received for physical injuries or illness as non-taxable. This rule applies to settlements or verdicts, whether they are received as a lump sum or through structured settlements.

The idea behind this general policy is that clients recovered something they lost--they did not obtain something new or added income. If someone steals $100.00 from you but then you get that $100.00 back, you don't have to pay taxes on that $100.00 recovered from the theft. The analogy carries over to damages in personal injury cases. For example, let's say you are injured in a bicycle crash in Champaign County, and you incur extensive medical bills. Our office will help you recover the costs of those medical bills. That recovery for what you lost is not taxable as new income.

In more legal terms, The Internal Revenue Code states that gross income does not include "the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness." IRC Section 104(a)(2)

Exceptions and Further Reading

There are some exceptions to this general rule. For example, punitive damages are generally taxable. Punitive damages are intended to punish the defendant for their wrongdoing, rather than compensate the plaintiff for their injuries. As such, the Internal Revenue Service considers them to be taxable income. The IRS offers extensive guidance into the nuances of this issue and a discussion of other exceptions. To find out more, you can read Tax Implications of Settlements and Judgments from the IRS's Website.

Our Office

The Law Office of Tom Reuland does not give tax advice. And this post is not tax advice of course. However, we can help secure large settlements and verdicts for people who have been injured by others. If you have any additional questions about the tax implications of a personal injury settlement or verdict, it's best to consult with a tax professional who can provide guidance specific to your situation. Feel free to contact us if you would like a referral.



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