Are Personal Injury Settlements Taxable? (2025)

Understanding Personal Injury Settlements

Personal injury settlements are the compensation you can receive when you file a lawsuit against the party that hurt you. The majority of personal injury claims are negotiated without needing to go to court. A successful negotiation results in a settlement that addresses your economic and non-economic losses.

These typically cover:

• Medical expenses, including future costs
• Lost wages
• Loss of earning potential
• Loss of enjoyment of life
• Pain and suffering
• Loss of consortium

In serious incidents that result in severe injuries, the settlement you receive could be as high as millions of dollars. It’s important to know whether a personal injury settlement is taxable or not to avoid running into problems with the IRS.

Are Personal Injury Settlements Taxable at the Federal Level?

The majority of the settlements you may receive from personal injury claims are not taxable. The IRS has exemptions for these and doesn’t consider settlements from accidents as taxable income because they compensate you for losses you suffered. This applies to all manner of compensatory losses, including economic and non-economic ones.

Is a pain and suffering settlement taxable, then? If the pain and suffering settlement you received was part of a larger settlement because of the physical injuries you suffered, then it’s not taxable. However, if you didn’t suffer a physical injury but did receive compensation for emotional distress, that compensation will be taxed.

For example, if you received a settlement after a trip and fall accident solely to compensate you for the severe anxiety you developed because of the incident, then the IRS can tax it.

The way that the IRS sees the settlement is as a means to “make you whole” after the economic losses you suffered because of the incident. The government recognizes these settlements as a way to get you back to before the accident, so it doesn’t consider them additional winnings.

Are Personal Injury Settlements Taxable at the State Level?

Each state has its own laws in place when it comes to whether settlements are taxable or not, but in the majority of cases, they aren’t. A significant number of states don’t have income taxes that you have to worry about in the first place, and the ones that do have them see settlements in the same way as the federal government: they cover your losses.

Considering Exceptions

In some instances, you may have to pay some taxes on parts of personal injury settlements. A common question people have is, “Are medical settlements taxable?” For the most part, they’re not. If, however, they cover previously deducted medical costs, then you would have to pay taxes on that part of the settlement.

Punitive damages are also taxable because they’re not compensatory. They count as income, so they’ll be taxed exactly as income would be at both the federal and state levels.

Other exceptions would be compensation for defamation of character or breach of contract. Since you didn’t suffer a physical injury, it’s likely that the IRS will tax the settlements for these types of claims.

Reporting Personal Injury Settlements to the IRS

Although the answer to the question, “Are bodily injury settlements taxable?” is no, you still have to report everything you receive to the IRS. The agency considers everything income. It needs to be able to account for all that you make in the year, whether that income is taxable or not.

After receiving a settlement, you’ll likely get a Form 1099-MISC. Add the information from this form to your tax return in the Other Income box. Having a lawyer helping you can help ensure that everything is done correctly and that you don’t end up with a tax liability because of a misclassification of the settlement.

Find an Attorney to Guide You Through the Settlement Process

After suffering losses in an accident or as a result of someone’s intentional act, you can receive compensation in the form of a settlement. To have a chance to get a fair amount of money, it’s essential that you hire experienced lawyers who can help you throughout the entire process, including during the negotiation stage.

At ConsumerShield, we are dedicated to helping people connect with the right attorneys in their local areas. We can offer legal guidance and point you in the correct direction so that you can receive the qualified and experienced assistance you deserve. Contact us to learn more about filing a personal injury claim.