-advertisement -

When are legal settlements taxed?


Dear Tax Talk,
I was involved in a motorcycle accident and now am expecting a pain-and-suffering settlement. Is the settlement taxable by the state or federal governments? -- Anon

- advertisement -

Dear Anon,
Amounts paid on account of physical injuries, dismemberment, disfigurement or accidental death are excluded from income. This is true whether the payment is made by way of a settlement or set by a court.

Amounts designated as punitive damages, however, are not excludable from income. Additionally, any amount that you receive for medical expenses that you may have previously deducted are not excluded from income.

Amounts relating to mental stress related to a physical injury are excludable from income. But amounts relating to mental stress from a personal injury unrelated to a physical injury are not excluded from income. For example, a settlement relating to slander, which is an injury to your reputation, is for personal injuries and is includable in income.

Compensatory damages for lost wages or income relating to your physical injury are also excludable from income.

Since most, if not all, states follow the same tax base as the Internal Revenue Service as far as what is considered income, you probably do not owe state income taxes either.

However, since each state has its own quirks, I would check with your state's taxation division.

-- Posted: Dec. 3, 2003




Looking for more stories like this? We'll send them directly to you!
Bankrate.com's corrections policy

Compare Rates
30 yr fixed mtg 4.45%
48 month new car loan 3.77%
1 yr CD 0.89%
Rates may include points

Mortgage calculator
See your FICO Score Range -- Free
How much money can you save in your 401(k) plan?
Which is better -- a rebate or special dealer financing?

Tax Basics
Knowing how to file can save you money.
Filling out the W-4 form
What is my tax rate?
How to itemize deductions
Tax credits can lower bill
Death and taxes
Tax record-keeping

Income tax rates  
Tax forms  
State taxes  
Tax basics

- advertisement -
- advertisement -