Personal Injury Blog

Do you have to pay taxes on a personal injury settlement?

Do You Have to Pay Taxes on a Personal Injury Settlement?

A personal injury lawsuit is a stressful experience for injured victims. Not only must they focus on regaining their health after suffering an injury through no fault of their own, but they must also wait on the wheels of justice to turn before they may be properly compensated. In many cases, personal injury claims take months, even years, to be finalized. Locating all appropriate parties, gathering evidence, and waiting on a court date often cause serious delays. At the end of it all, when you finally receive your money, do you have to hand a large chunk of it to the IRS?

As with most legal questions, the answer is: it depends.

In general, all income is taxable under both New Jersey and federal law. However, in most cases, settlement funds from a personal injury claim are not considered income under relevant tax laws in New Jersey. Whether the damages received are taxable depends on the type of damages awarded in a settlement.

In a personal injury claim, there may be considerable out-of-pocket expenses the victim has had to pay, such as medical bills. An award that compensates a victim for out-of-pocket expenses is generally not taxable, unless the victim deducted these expenses from his or her income the previous year. In this case, reimbursement of these expenses is taxable. After all, it would be unfair to receive a windfall after deducting these out-of-pocket expenses from one’s tax liability.

If your settlement includes punitive damages, be prepared to pay taxes on it. In New Jersey, punitive damages are taxable income.

Additionally, if your settlement has earned any interest income, you must pay taxes on the amount of interest you have earned.

If you have filed a personal injury lawsuit, you should speak with an experienced accountant to discuss any tax liability you may be facing at the end of your case. You should prepare accordingly so that you do not face any unpleasant surprises once your case has been finalized.

The purpose of damages is to make an injured victim “whole” again after an accident. With the assistance of a qualified personal injury attorney, you maximize your recovery and ensure that your legal rights are thoroughly protected. If you have been injured, you should seek an experienced New Jersey personal injury attorney as soon as possible.

Call today to schedule a free consultation

At Leonard Legal Group, our attorneys are experienced in all types of personal injury claims. We serve clients throughout New Jersey and work hard to ensure you receive the money you deserve. To schedule your free consultation, call (973) 984-1414 or visit us online.