Are Personal Injury Settlements Taxable?

February 22, 2024

If you’re navigating a personal injury lawsuit and expect to receive a settlement payment, it can bring both relief and stress. While you’ll be able to pay for damages you’ve suffered because of your injury, it may also leave you wondering whether you’re now responsible for additional expenses on your next tax return.

Fortunately, most settlements are not taxable. But we’ll cover what you should expect, and how your personal injury attorney can assist you in recouping the most money possible from your settlement.

Understanding Your Personal Injury Settlement

A personal injury settlement is a monetary amount awarded when a person sues someone who caused them harm. To receive a settlement, the accident victim has to successfully prove their injury was caused — either directly or indirectly — by a party who had a duty to protect them and failed to do so.

Settlements aren’t restricted only to certain types of injuries, either. Whether you were in a car accident or injured by a defective product, your settlement is determined by whether another party is responsible for your injury. When determining your settlement amount, your case will examine damages such as:

Medical expenses
Lost wages
Mental and emotional distress
Pain and suffering

The amount of your settlement will vary based on your individual personal injury case. But in general, your settlement amount can be affected by:

Your Percentage of Fault

This means the amount you can be awarded is reduced based on how much blame can be placed on you for your injury.

For example, if a car hit you while riding your bike, you have a personal injury claim. However, if you crossed a lane of traffic without signaling, you may be partially responsible for the accident, and therefore receive a lower settlement.

Damage Caps

Damage caps limit the amount of damages that can be awarded in a personal injury case. These caps usually do not apply, but it’s good to be aware of them. In Indiana, the following cases are subject to damage cap laws:

Claims brought against the state and local governments are capped at $700,000.
Medical malpractice claims are capped at $1.8 million for any incident that occurred after June 30, 2019
Wrongful death claims are capped at $300,000 for plaintiffs who are seeking damages for a deceased person who was unmarried and without dependents at the time of their death and who don’t otherwise fall under the child wrongful death statute. If these conditions do not apply, there is no cap.

Failure to Mitigate Damages

In the state of Indiana, you have an obligation to mitigate the damages of your injury. This means once you’ve been injured, you are responsible for taking action to prevent further injury or following any care regimen prescribed by health professionals.

If you fail to do so, you may receive a reduced amount or not receive a settlement at all.

Do You Have To Pay Taxes on a Lawsuit Settlement?

For personal injury settlements that involve bodily injury claims, the answer is generally no. Most money you receive from a settlement is not taxable in Indiana or at the federal level. However, there are a few instances where you will have to pay taxes, so it’s good to be aware of them prior to receiving funds.

It’s also worth noting that the method you settle your case — whether in court or out — usually does not affect the tax status of your settlement.

Any settlement amount you receive for medical bills, attorney’s fees, or pain and suffering are not taxable. Most settlements that relate to property damage are also not taxable, as they are considered a reimbursement for expenses you’ve already incurred.

However, if any of these categories are part of your personal injury settlement, they may be subject to taxes:

Punitive damages. This is a monetary amount that is paid by the defendant, or the person who caused you injury. Its purpose is to punish them, but also to serve as a warning to others not to engage in negligent behavior.

Lost wages. If you receive back pay for work missed because of your injury, you could still have to pay income tax on it. There is no additional tax because of the settlement, however.

Interest. If interest accrues while your case is in progress or while you wait for your settlement to be paid, the interest is taxable.
Emotional distress or mental anguish. If part of your settlement relates to emotional distress, the amount may be taxable if it is not associated with a physical injury. Examples of this are cases related to harassment, discrimination, or invasion of privacy.

Since Indiana does not generally itemize a settlement amount to delineate a certain number of dollars allocated for lost wages as opposed to medical bills, pain and suffering, etc. most of our settlements are not taxed. Keep in mind these rules only apply to personal injury settlements. Other settlements or monetary awards may be subject to different tax laws. In any case, your best bet is to discuss your case with your personal injury lawyer and a CPA or other tax expert for specific advise on your particular case.

Injured? BB&C Can Help Maximize Your Settlement

For over 70 years, BB&C has been a leading advocate for injured individuals, offering comprehensive legal services and unwavering support. Our team of professionals has extensive experience in handling personal injury cases of all types. We are dedicated to providing our clients with the highest quality legal representation.

We understand that a personal injury can have a significant impact on your life, both financially and emotionally. We take a holistic approach to your case, addressing your legal needs while also providing you with resources and support to help you through this difficult time.

If you have been injured due to someone else’s negligence, contact BB&C today for a free consultation. We are here to help you get back on your feet.

Disclaimer: The content of this blog is intended to be general and informational in nature. It is advertising material and is not intended to be, nor is it, legal advice to or for any particular person, case, or circumstance. Each situation is different, and you should consult an attorney if you have any questions about your situation. BB&C are not tax lawyers. Any specific tax advice must come from a tax attorney or CPA.