As tax season arrives, a reasonable question to ask if you have received compensation from a personal injury settlement is whether or not such compensation is taxable and should be reported to the government.
In general, damages from injury claims are not subject to either federal or state income taxes. Thus typical damages intended to compensate for losses such as lost wages, medical bills, emotional distress, loss of consortium, pain and suffering, and even attorney fees are not taxable so long as they stem from a personal injury or sickness.
Some exceptions do apply. Your damages relating to a breach of contract can be taxed if the breach caused your injury or sickness in some way and the breach is the basis of your suit.
Additionally, any punitive damages can be taxed which are different from compensatory damages and intended to punish the at-fault party. Interest on the judgment is also taxable. This is interest added to the verdict for the length of time the case has been pending.
Claims for emotional distress or employment discrimination where physical injury is absent can have their settlements or verdicts taxed. For this reason you should try and make sure as much of your settlement is not able to be taxed. In the case that you have two claims against a person, one personal injury-related and the other non-physical, you should explicitly state in the settlement agreement how much of the settlement pertains to the injury claim.