Steinberg, Goodman & Kalish Personal Injury Attorneys | Chicago, IL
Se Habla Español
Free Initial Consultations 888-325-7299

When Is Personal Injury Compensation Tax-Free?

Remember Dr. David Dao, the man who was dragged off a United Airlines plane even though he had paid for his seat? His attorney negotiated a settlement with the carrier, and though its terms were confidential, most observers assume that the settlement was substantial.

It turns out that in all likelihood, Dr. Dao will not have to pay income taxes on the amount of the settlement. That's because in most cases, personal injury compensation is exempt from federal income taxes as well as state taxes. In this blog post, we will discuss the tax treatment of personal injury compensation, when such compensation is exempt from taxation, and when it may be taxable.

Will You Have To Pay Taxes on Your Personal Injury Compensation?

Generally speaking, personal injury settlements and jury awards that compensate for medical costs are exempt from federal and Illinois income taxes. Noneconomic compensation for physical pain and emotional suffering can also be exempt, but with one proviso: the pain and suffering must be directly related to the physical injury. Attorney fees that a plaintiff receives as part of a settlement are also tax-exempt. Plaintiffs may not even have to report the proceeds of a settlement or jury award on their tax returns.

However, some categories of personal injury compensation can be subject to taxation:

Lost wages or income - The IRS considers this as taxable income, and it must be reported on the recipient's tax return.

Interest - If the settlement or award includes interest, this will have to be included on the tax return and it will be subject to taxation.

Punitive damages - These are designed to make an example of the defendant in the eyes of the public and to serve as a warning to other parties who behave in a similar manner. Because punitive damages are not designed to compensate for the specific losses of the plaintiff, they are subject to taxation.

Emotional suffering and anguish not related to a physical injury - Compensation for non-physical injuries such as loss of reputation, harassment, or invasion of privacy are taxable.

When a settlement or jury award contains compensation for a taxable item, that portion of the amount must be listed on the recipient's tax return for the year he or she receives the money. However, some personal injury cases are resolved through structured settlements. In a structured, the defendant spreads out payment of compensation over several years. When a structured settlement contains taxable items, those taxable items must be included on the recipient's tax returns each year.

An experienced attorney can answer your questions about personal injury compensation, and if necessary, advise you of your legal options.

No Comments

Leave a comment
Comment Information
Scholarship AwardWin A $1,000
Scholarship Award

Submit a 500 words or less topic-specific essay by July 15, 2018 via this website for a chance to win a $1,000 scholarship from Steinberg, Goodman & Kalish.
Click Here for more submission details on how to win.

Get The Settlement That You Deserve Tell us about your case and we’ll get back to you with a FREE case evaluation.

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Schedule Your FREE Consultation
Map

Office Location

20 North Clark Street 31st Floor
Chicago, IL 60602

Toll Free: 888-325-7299
Phone: 312-445-9084
Fax: 312-782-6739
Chicago Law Office Map

Contact Us

Review Us