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Is a personal injury settlement taxable income?

On Behalf of | Jan 1, 2024 | Personal Injury |

As 2023 winds to a close, many Florida residents are gearing up for tax season. Filing federal tax returns is more complex for some people than others, especially if issues have arisen during the year that have tax implications, such as winning a lottery, receiving an inheritance or obtaining compensation for damages in a personal injury claim. Portions of income may be exempt from taxes; however, it is always best to seek guidance and support from a knowledgeable source rather than assume one does not have to pay taxes.

Regarding a personal injury settlement, there are several key issues to keep in mind to determine whether it is taxable income. Internal Revenue Code Section 61 states that all income is taxable unless exempted by another provision of the Code. The average person may not possess the necessary knowledge to determine if a personal injury settlement is taxable, which is why it is helpful to consult with an injury law attorney before filing tax returns.

Discrimination claims and physical personal injury settlements

IRC Section 104 lists physical injury settlements as exempt income. This means that anyone who receives compensation for physical injuries in a court case, such as a claim filed after a car accident, does not have to pay taxes on the physical injury settlement. A similar exemption exists for court-awarded compensation in certain types of discrimination claims.

A legal action or out-of-court settlement for a sickness that occurred as the result of a personal injury is also exempt on federal income tax returns. Settlements typically fall into three categories, including physical damages, emotional distress and punitive damages. To determine whether all or a portion of a specific settlement is taxable, it is best to seek support from an accountant or a Florida personal injury attorney.


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