Are Personal Injury Settlements Taxable?

One of the most common questions we receive is whether a client’s personal injury settlement is taxable or whether they will have to pay taxes on a settlement they received. We always advise that clients consult with a professional, certified tax professional or CPA to learn more specifically about their tax obligations. You can also visit the IRS page regarding the Tax Implications of Settlements and Judgments.

In the meantime, this article will hopefully provide basic information about how personal injury settlements are affected by California state taxes.

Hiring The Right Attorney Protects You From Paying Taxes On Settlements

Hiring an experienced personal injury lawyer can protect you from paying more than you should in taxes after receiving your settlement. California has specific rules about which portions of a settlement are taxed and which are not. 

Untaxed Settlement Funds

The following types of settlements are typically not taxed by the federal or state tax boards.

Money related to past and future medical care

Any money paid to you for past or future medical care is not taxed by the IRS or CA’s franchise tax board. This is one of the reasons why it is so important that you seek high-quality medical attention—and contact a personal injury attorney—immediately following any accident. The combination of accurate documentation and the awareness of an experienced personal injury lawyer can help maximize medical settlements, keeping as much money in your pockets as possible and out of the tax coffers. Below are examples of types of medical treatment for which you cannot be taxed:

• Medical appointments
• Rehabilitation
• Prescription medications or doctor-recommended supplements
• Treatment costs
• Projections for fees you’ll incur from future treatments or therapies required to continue healing and comfort

However, if you have already used some of your injury-related medical expenses as a tax deduction in a previous tax year, that portion will be taxed when you receive your settlement (see more on that below).

Some Medical Reimbursements May Still Be Taxed

In most cases, a personal injury lawsuit and any related settlement are resolved in a future tax year from when the original accident/injury occurred. As a result, if you claim any of those medical expenses as a deduction in a previous tax year, you may have to pay taxes on the recovery received later. In that case, when your settlement comes through, plan to pay taxes on the amount that equals the total medical expenses you deducted in the past.

Again, we highly encourage anyone planning to receive a personal injury settlement to speak with a CPA or tax accountant to determine your tax exposure. 

Mental/emotional pain and suffering related to the injury

Mental and emotional health is also included in the untaxable medical/punitive settlement arena. People are often unaware of the psychological effects of a personal injury or accident until weeks, months, or even years after an accident.

Good personal injury lawyers understand how accidents and injuries increase our clients’ risk of anxiety, depression, and PTSD. We will help connect you with a therapist who can help you work through your experience, and these fees and others become part of the untaxed portion of your settlement as long as it can be proven your suffering is a direct result of the accident/injury.

Tips To Minimize Taxes On Personal Injury Settlements

There are things you can do to minimize how much in tax you may have to pay from your personal injury settlement. This includes things like:

• Negotiating for the highest amounts of the settlement to be allocated into non-taxable categories.
• Spread the settlement into portioned payments for several years rather than one lump sum, minimizing or eliminating taxes owed each year.
• Consult with an estate planning attorney to discuss creating a family trust, which can minimize tax obligations over the course of your lifetime—including the portions paid out to you via a legal settlement.

Burneikis Law Strives To Minimize Client Tax Obligations

While we understand your desire to avoid paying taxes, receiving the settlement you deserve is well worth your time. The team at Burneikis Law is experienced in helping our clients optimize personal injury settlements so you can retain what is rightfully yours. Contact us to schedule a consultation.