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Are Personal Injury Settlements & Verdicts Taxed?

The most important aspect in the aftermath of an accident caused by negligence is the recovery of those who aren’t at fault for it. Obtaining a fair settlement or verdict means that a party is receiving much-needed compensation after suffering from the reckless actions of another party. Since compensation from a settlement or verdict is so important, those who receive one might be worried about having their compensation taxed. Here, we’ll discuss how verdicts, settlements, and taxes work.

What’s the Difference Between a Verdict & a Settlement?

First, it’s crucial to understand the basic differences between a verdict and a settlement. A settlement is something that’s offered by another party or their insurer offers to settle an issue. For example, if a person caused a car accident, it’s possible that their insurer will offer something to the party that wasn’t at fault to "settle" the incident. Once a person accepts a settlement, they’re unable to pursue further damages that they may need.

In other instances, a settlement is a deal that a party agrees to before a case goes to court. For example, if a person refused an initial settlement from a negligent party and hires a lawyer to demand compensation, the lawyer might work with the at-fault party on a settlement that satisfies the needs of their client. Once accepted, this settlement means that both parties have agreed to avoid taking the case to court.

Verdicts are what a court awards when two parties are unable to agree on a settlement. After all parties in an incident present evidence and provide other pieces of information, a judge or jury will decide how much money one party owes the other. This is known as a verdict.

In short, settlements are the result of an independent agreement between parties while verdicts are produced when both parties fail to work things out and leave the process to a trial.

Personal Injury Compensation & Taxes

Generally, compensation for a personal injury claim is not taxed whether it’s the result of a verdict or a settlement. A person who receives compensation for damages like medical bills, lost wages, pain and suffering, and more. However, there are some aspects of a personal injury verdict that can be taxed.

Since personal injury verdicts are decided by a court, they can include damages that are not possible during settlements. Punitive damages are one of these unique types of damages awarded by courts. When a court awards punitive damages, they are doing so to punish a negligent party financially rather than criminally. This means that punitive damages are different than other types of personal injury compensation because they are not meant to restore something that a party lost. The nature of punitive damages makes the subject to taxation at the state and federal level.

Another type of compensation that can be taxed is payments for injuries that are not physical. This makes compensation for emotional injuries subject to taxes in some instances. Finally, any interest that is owed on a verdict is taxable. Courts might place interest on a late or missing verdict payment to help a person account for the time it took to decide their case. Since interest isn't compensation for physical injuries, it may be subject to taxation.

In summary, aspects of a personal injury settlement or verdict include the following:

  • Compensation for emotional injuries
  • Punitive damages
  • Interest

How You Should Handle Taxes for a Settlement or Verdict

It’s important to work with an attorney who will make sure your settlement or verdict is clearly categorized. This way, it’ll be easy to separate what aspects of your compensation is taxable. An attorney should make sure your settlement is clear about what amounts of compensation are for what damages. Or, if they’re obtaining a verdict on your behalf, a personal injury lawyer should as the court to clearly state what amount of compensation is for what type of damages.

If you're uncertain about the taxes that your settlement or verdict might have, it's best to speak with a financial professional as soon as possible.

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