Are you wondering whether or not your personal injury settlement is taxable? This is an important question to ask since sometimes the answer is yes. However, it is more common for recipients of personal injury settlements to not have to pay state or federal taxes on the amount they are awarded following the conclusion of a case. Continue reading to learn more, particularly as it relates to Indiana law.
General Rule of Personal Injury Payouts
Personal injury settlements are awarded to compensate victims for their damages and losses. Because of this, the general rule of thumb applied to personal injury payouts and income tax is that recipients do not have to pay taxes on the compensation they recover in a case. Yet, as with all things in life, there are always exceptions to the rule. Sometimes, personal injury compensation is taxable.
Regardless of whether compensation is recovered in or out of court, so long as the recipient’s settlement is awarded to compensate for physical illnesses and injuries, their gross income is excluded from being taxed under the federal income tax code. As for state tax codes, they simply follow suit with federal tax codes, which means a personal injury settlement is exempt from being taxed by the state as well. You can get detailed information about this at IRS.gov.
For those who are awarded personal injury compensation for punitive damages, recipients are not typically exempt from paying state or federal tax. Punitive damages, also known as exemplary damages, are not intended to compensate a victim for the loss of their quality of life. Instead, they are meant to punish the at-fault party, as well as, set a public example and deter the particular type of gross negligence involved in the accident. See our blog, “What are Punitive Damages in a Personal Injury Lawsuit?” to learn more about the types of damages awarded in a personal injury case.
Although recipients of compensation for punitive damages must pay taxes on their settlement, they are allowed to deduct attorney fees from this amount. For instance, if a personal injury victim is awarded $100,000 and their lawyer uses the 1/3 contingency fee payment arrangement, they could deduct $33,333.33 from their settlement amount, leaving only $66,666.67 to be taxed.
✏ Compensation for Physical Injuries and Illness – NOT TAXABLE
✏ Compensation for Non-Physical Injuries –TAXABLE
Our Trusted Indiana Personal Injury Lawyers Are Here For You
Call Craven, Hoover, and Blazek P.C. at 317-881-2700 to learn more about recovering compensation through a personal injury claim, wrongful death claim or medical malpractice claim in Indiana. You can schedule a free consultation with an experienced Indianapolis accident attorney who can determine the best strategies for your Indiana personal injury case. Not only does our law firm offer free consultations, we never collect lawyer fees unless we prevail for you! We represent injured persons throughout Indiana, as well as the surviving dependents in wrongful death and medical malpractice cases.