Could you be Taxed for your Personal Injury Compensation?

Chris Balme
June 12, 2013

Sadly we appear to live in a world where almost everything is taxable, including justice. Some personal injury compensation packages including those awarded for harassment and discrimination may be subject to the taxman’s whims.

Whilst physical injuries cannot legally be taxed; legal and emotional injuries may be subject to taxation with the claimant receiving only a fraction of the awarded sum. Furthermore the compensation awarded for sickness and industrial diseases may be taxed by the state, potentially eating in to the medical bills that may crop up as a result of the injury and the negligence that caused them.

This taxation stands regardless of whether the case has been settled in or out of court or if the compensation is paid in a lump sum or in instalments.

Punitive damage awards (the amounts paid out as a punishment for the guilty party) are also taxable unless they are awarded in civil wrongful death awards in states where applicable law dictates.

Physical injury compensation packages are federal income tax free including awards designed to cover medical costs and lost living costs. However medical costs that are paid for before the award of a compensation package will be taxed, which you are required to ‘recapture’ retroactively by reporting it as an income on your tax return.

Furthermore, if your injury means that you are not physically able to continue working, you are entitled to loss of wages compensation. This compensation is not taxable, even if the wages that it is replacing are taxed.

If you are receiving compensation for both tax-free and taxable damages, the taxable amount must be reported as income on the tax return with no reduction for fee payable to a personal injury solicitor. This means that if you are making a road accident claim and suffered physical injuries as well as mental traumas then you would be required to list the taxation placed upon the compensation awarded for the mental traumas on your return.