For the most part, compensation you receive as a personal injury settlement is not taxable on the state or federal level whether you received the funds as a settlement before trial or after filing a lawsuit. Federal law even considers damages from a personal injury claim apart from your gross income.
When personal injury compensation is recovered in order to pay for expenses such as lost wages, medical bills, emotional distress, pain and suffering, loss of consortium, and attorney fees, these are not considered taxable income so long as they stem from a personal injury or illness.
When Damages can be Taxed
Exceptions apply to breach of contract cases—even if as a result of the beach of some contract you are injured or become sick, damages relating to the breach are taxable. Punitive damages, which are meant not to compensate, but rather to punish, are also taxable. Such damages are usually separated from compensatory damages by the judge or jury.
In addition, interest which can accrue on damages for as long as the case is pending is taxable. Further, claims for compensation to go toward non-physical injuries are taxable. Rewards for emotional distress or employment discrimination are therefore taxable unless you could prove even the least amount of injury was sustained.
In the event that you have two claims against a defendant, one being personal injury related and other not, you should be explicit in stating in the settlement how much of it relates to the personal injury claims and which the non-personal injury claim.
If you are hurt through another person's negligence, you need an experienced Seattle personal injury attorney to recover damages to cover your expenses related to your injury. If you were harmed or have questions, call our offices at Ward Smith, PLLC.