If you have received a personal injury settlement, you might be wondering what happens when tax season comes around. One of the most common questions accident victims ask is whether the IRS can take a portion of their settlement. The answer depends on what type of damages you received and how the settlement is structured.

As a trusted California personal injury attorney, BD&J often advises clients on what to expect after a case is resolved and how their settlement may affect their taxes. Here is what you need to know.

General Rule: Most Personal Injury Settlements Are Not Taxable

In most cases, the IRS does not tax personal injury settlements that compensate you for physical injuries or physical sickness. This includes money awarded for medical expenses, hospital bills, rehabilitation, and pain and suffering directly related to a physical injury.

According to IRS guidelines (Publication 4345), if you receive a settlement or jury award because you were hurt in a car crash, slip and fall, or another type of accident, the compensation you receive for those injuries is typically not considered taxable income.

What Portions Might Be Taxed?

While most of your settlement may not be taxed, some parts of it can be, depending on how your damages are categorized.

Here are some examples:

• Lost Wages: If part of your settlement replaces income you would have earned, the IRS may consider that portion taxable, just like your regular paycheck.

• Interest on the Settlement: If you earned interest on your settlement (for example, while the funds were held in escrow), that interest is typically taxable.

• Emotional Distress (Unrelated to Physical Injury): If you received compensation for emotional distress not connected to a physical injury, that portion could be taxable.

• Punitive Damages: These are meant to punish the defendant for serious wrongdoing and are usually taxed, even if they arise from a personal injury case.

Should I Report My Settlement to the IRS?

Even if your settlement is not taxable, it’s still a good idea to consult a tax professional when filing. In some cases, the IRS may request documentation to confirm how the settlement was structured. Your

attorney should provide you with a breakdown of your award, which your tax preparer can use when completing your return.

Frequently Asked Questions

1.  When should I contact a personal injury attorney in California?

You should contact a personal injury attorney as soon as possible after an accident. Early legal help can protect your rights, preserve important evidence, and ensure you do not make statements to insurance companies that could harm your claim. The sooner an attorney is involved, the better positioned you are for a strong outcome.

2.  How do I know if I have a case?

If you were injured because of someone else’s negligence, whether in a car crash, slip and fall, or another type of incident, you may have a personal injury case. A qualified attorney can review the facts and help determine whether you are entitled to compensation.

3.  What happens after my case is settled?

After your case settles, you will receive your portion of the agreed compensation, usually by check. Before that happens, your attorney will ensure any medical or outstanding costs are resolved. You should also discuss with a professional how the settlement may impact your finances.

4.  Can I avoid taxes on my personal injury settlement?

You cannot “avoid” taxes, but most personal injury settlements are not taxable when they cover physical injuries or illness. However, portions related to lost wages, interest, or non-physical damages may be taxable. A tax advisor can help you understand what applies to your specific case.

5.  What is the plaintiff double tax trap?

This refers to a situation where a plaintiff may be taxed twice; first on the portion of the award that reimburses taxable income like lost wages, and then again on attorney fees if they are not fully deductible. It is a technical issue that underscores the importance of reviewing settlements with both your attorney and a tax professional.

6.  Will I have to pay taxes if I receive a structured settlement?

Structured settlements spread payments over time and may have tax advantages. In many cases, the portion related to physical injury remains tax-free, just like a lump sum would. However, any interest or investment gains may be taxable. Your attorney or financial advisor can help you understand how your specific structure is set up.

7.  Do I need to file a tax return just because I got a settlement?

Not necessarily. If the entire settlement is for physical injuries and is not otherwise taxable, you may not need to report it as income. That said, it is always a good idea to mention the settlement to your tax preparer in case documentation is needed or any portion of the settlement is taxable.

8.  Can I still be taxed if the case went to trial instead of settling?

The tax treatment is generally the same whether you settle out of court or win at trial. What matters most is how the award is categorized. If the damages are for physical injuries or medical expenses, they are typically not taxable. Punitive damages and interest on the judgment may still be taxed.

How to Find the Right California Personal Injury Lawyer Near You

For many California residents, personal injury lawyers are a dime a dozen in California. In fact, many people believe they’re all the same and it doesn’t matter which you work with. While the billboard lawyers along the highway may spread their names far and wide, that doesn’t mean they’re necessarily right for you or your case.

1. Ask around your community: Find an attorney via word of mouth or online reviews who communicates well, has a long track record of great recoveries for clients, and meets clients where they are.
2. Look for demonstrated success: If you have a personal injury claim in California, look for personal injury lawyers near you who demonstrate compassion, experience, and success. Many lawyers post their successful results on their websites or social media.
3. Meet with a few options before committing: While results and reviews are important factors, it’s also important you and your personal injury attorney get along well. Meet with multiple lawyers before you sign on with one to ensure the best fit.

At BD&J, our team sees ourselves as part of your recovery journey. We come to you – at the hospital, at home, or at your favorite coffee shop – to discuss the details of your case and connect you with the best medical experts. We also understand that waiting for a lawsuit to resolve can cause financial stress.

Work With a California Personal Injury Attorney Who Understands

At BD&J, we know your personal injury case doesn’t end when the check arrives. Our legal team is committed to helping clients understand every aspect of their recovery, including how settlements may affect their finances. With over 20 years of experience and more than $2 billion recovered for accident victims across California, we are here to protect your interests from start to finish.

If you have questions about your personal injury settlement or want to explore your legal options, contact us today for a free consultation.