February 25, 2024

If you win a personal injury case, ideally, you’re supposed to just get your settlement from the defendant minus the legal fees for lawyers. However, you might not know that another party also gets a share– the IRS. Most people don’t actually know that their settlements are taxable. Because of this, it’s possible for plaintiffs to lose half of their settlements because Uncle Sam takes them away. Fortunately, there are ways you and your lawyer can protect most of your settlements from the grasp of the IRS.

Get A Good Lawyer

First of all, you have to get a good lawyer. While there are general rules with regard to the law, each state has rather different processes. This is why you need to get a lawyer from your state. For instance, if you live in Norfolk, then you need a Norfolk personal injury attorney. Get someone familiar with your state’s laws.

Know What is Non-Taxable

The first thing to know is which parts of the settlement are non-taxable. As a general rule, all the proceeds received from personal injury cases are non-taxable. This is especially true for the damages received from a physical injury or physical sickness. Let’s say you experienced a car accident. Settlements to cover your lost salaries, hospital bills, opportunity losses, emotional distress and the like are non-taxable.

Know What is Taxable

Just like all other rules, there are exceptions to the non-taxable personal injury proceeds. Even if the damages you receive for physical injuries cannot be taxed, damages related to the reason are taxable. For example, if you are a victim of medical malpractice, the damages related to the medical malpractice are taxable. This may hold true even if the damages to physical injuries are non-taxable.

Also, punitive damages are always taxable. Punitive damages are damages due to malicious intent. If your lawyer files for punitive damages, then your settlements are taxed.

File Your Case Correctly

Now that you know some of the things that are taxable and non-taxable, what’s next? First, you must discuss with your lawyer what type of damages you want to claim in your case. As mentioned earlier, damages related to the result of the personal injury case are always non taxable. These damages are called compensatory damages.

To protect your settlements from the IRS, focus more on compensatory damages. If you want to claim punitive damages, then ensure your compensatory damages are higher. This is because punitive damages are taxable. It’s also mentioned above that the damages related to the reason for the physical injury are taxable. With this, the lawyer should focus more on what happened to you instead of why it happened.


In an ideal world, you’re supposed to just get your settlements after you’ve won your case. However, in the real one, you still have to continue to protect your case even after you’ve got your settlement. Do take note that you’ll still pay taxes for them. The goal here is to minimize the taxes you have to pay.