Under the Internal Revenue Code, payment to an accident victim made for pain, injury, and suffering is nontaxable. Because the tax code is constantly changing and because there are certain exceptions to this general rule, you should consult your accountant and tax advisors to determine the tax effect of your settlement. However, you should be hopeful because in almost every case, there is no state or federal income tax due from your injury settlement!
The only concern and primary exception to the non-tax rule is the case where money is collected for lost income. If you collect a specific amount for lost wages, this compensation would be subject to income tax. However, most settlements are structured as “lump sum” settlements, and the claim is also identified as “disputed” in nature and amount. As long as a specific amount is not collected or identified in the Release documents as lost wage reimbursement, the entire settlement should be shielded from income tax obligations. Your personal injury attorney or tax advisors can help you consider your case and your financial circumstances to be certain that you do not have to share your settlement money with state or federal tax authorities.