Minnesota generally follows federal law regarding taxes on personal injury settlements, meaning most compensation for personal injuries is not taxable. However, there are exceptions. This guide explains when personal injury settlements are taxable and how you can minimize your tax liability.
Navigate This Page
- Will I Have to Pay Taxes on My Personal Injury Settlement?
- Taxation of Compensation for Injuries or Illness
- Taxation of Pain and Suffering Compensation
- Taxation of Property Loss in Personal Injury Settlements
- Are Punitive Damages Taxable?
- Are Interest Payments on Settlements Taxable?
- Contact Our Personal Injury Lawyers to Protect Your Legal Rights
- Related Reading:
Will I Have to Pay Taxes on My Personal Injury Settlement?
Personal injury settlements are typically not considered taxable income, even if paid as a large lump sum. However, some types of compensation, such as punitive damages or non-physical injury damages, may be taxable.
It’s essential to understand how your settlement is structured. Our Minnesota personal injury lawyers can help you navigate these complexities and ensure you minimize your tax liability.
Taxation of Compensation for Injuries or Illness
General Rule for Physical Injuries
Under Title 26 § 104 of the U.S. Code, damages awarded for physical injuries or illnesses are not taxable income. This includes compensation for:
- Medical expenses
- Lost wages
- Other related financial costs
Damages awarded in a wrongful death claim are typically subject to the same rules if the damages are related to the decedent’s physical injuries or illness.
Exceptions to the General Rule
If you previously deducted medical expenses from your taxes and the settlement includes compensation for those same expenses, the portion of the settlement that reimburses those expenses is taxable. This exception applies only if you received a tax benefit from making those deductions.
Taxation of Pain and Suffering Compensation
Pain and Suffering Due to Physical Injury
If your settlement includes compensation for pain and suffering stemming from a physical injury or illness, it is not taxable. This includes damages for:
- Emotional distress
- Physical pain
- Loss of bodily functions
- Loss of enjoyment of life
- Scarring or disfigurement
Emotional Distress Not Linked to Physical Injury
However, if your settlement includes damages for emotional distress not linked to a physical injury, that portion of your settlement is taxable. This is a rare scenario in personal injury claims, as most claims involve physical injuries.
Taxation of Property Loss in Personal Injury Settlements
Compensation for Property Damage
You can recover the value of damaged property, such as your vehicle, without it being taxed. However, if your settlement exceeds the adjusted basis (the value of the property), the excess compensation is taxable.
Are Punitive Damages Taxable?
Unlike compensatory damages, which aim to make you whole, punitive damages are awarded to punish the defendant for egregious behavior. These damages are always taxable, regardless of the nature of the injury or loss.
Are Interest Payments on Settlements Taxable?
Any interest accrued due to a delay in settlement payments is considered taxable income by the IRS. This interest must be reported as part of your total settlement payout.
Contact Our Personal Injury Lawyers to Protect Your Legal Rights
With over 50 years of experience helping injured accident victims in Minnesota, Sieben Polk P.A. can guide you through the tax implications of your settlement and ensure you get the best outcome. We provide tailored legal services that balance the resources of a national law firm with the personalized service of a local practice.
Call (651) 437-3148 or contact us online to schedule your free consultation. You pay nothing unless we secure compensation for your claim.
