When going for personal injury settlements, one of the most common questions most people asked is whether they will have to pay any tax on their settlement. Since they are likely to get monetary compensation from the person who is responsible for their injury, this is a suitable question to ask, more so because authorities such as insurance companies and the legal courts are involved. So, do you have to pay taxes on your personal injury settlements or not?
First and foremost, you need to understand what the purpose of the settlement is for you. At its bare minimum, this settlement is for you to cover the expenses you might have incurred in getting treatment for yourself and any treatment you might be going through in order to prevent the injury from aggravating. It is also a kind of compensation for the psychological trauma you will have gone through when you suffered the personal injury and in its aftermath. If you are seeking your personal injury settlement for just these reasons—i.e. for treatment and compensation for your mental turmoil—then you are deservingly asking it. That is the reason why you don’t have to pay any taxes on such personal injury settlements.
So, if your compensation is just for your medical bills and, to an extent, a way to compensate for your mental trauma following the incident, then you are not liable to pay any taxes.
However, personal injury settlement cases can take different forms. There are cases where people who have undergone personal injuries ask for exemplary damages as well. This is when they want certain punitive measures to be employed on the guilty party. Now, if you are going to seek such compensation as well, then you have to pay taxes on them.
To understand this, think about why exemplary damages are slapped on the guilty party. It is so that they are made an example of and so that the guilty person takes care not to indulge in such acts again. They are not meant to benefit you. That is the reason you will have to pay taxes on any exemplary damages that you might be trying to fork out of the person who is at fault.
So, the clear cut answer to the question of whether you pay taxes on your personal injury compensation is if you are seeking only physical or mental damage compensation, you don’t pay any taxes. But if you seek punitive or exemplary damage compensation, then you have to pay taxes on whatever compensation you get in that particular regard.
For more information and advice on personal injury claims, please feel free to visit our making a Personal injury claim page and our Personal Injury resources page