are legal settlements taxed?
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
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