Personal Injury Tax Ramifications
In Personal Injury, Wrongful Death and Punitive Damages Recoveries
Generally, money received in settlement or through collection of a verdict to recoup medical bills, property damage, and pain and suffering resulting from physical injury are not taxable. Money received to recoup lost wages and income are taxable. Money received as punitive damages are taxable. Money received on account of employment discrimination or dignitary torts such as libel, slander, and malicious prosecution are taxable.
Obviously, a gray area is presented when one receives money from a general verdict or from a lump sum settlement when no allocation is made with regard to what is being reimbursed. When considering a personal injury case, to be safe, one should allocate for tax purposes that part of the recovery that was based upon income/wage loss.
Please keep in mind we are not tax attorneys and only mention this general advice as it relates to our consumer practice. If you are in doubt as to whether a personal injury settlement or verdict collection should be included as income, we suggest you consult with the person who prepares your taxes for an interpretation of Internal Revenue Code Sec. 104(a)(2).