Court settlements are taxable. Right? The short answer is usually, but with one major exception. The exception made to federal tax law applies to personal injury settlements and awards, although that isn’t even absolute. Let’s take a look at whether or not you pay federal taxes on a personal injury settlement or award.

Personal Injury Settlements

There are three types of personal injury settlements: compensatory damages, lost wages and punitive damages. We’ll briefly explore the definition of each settlement.

  • Compensatory damages include any measurable expense incurred resulting from your accident. This includes economic damages, like medical expenses, property damage. Also included in compensatory damages can be non-economic damages, such as emotional distress, mental anguish or loss of consortium.
  • The calculation of lost wages includes loss of paychecks or a source of income. This is certainly the easiest monetary claim to make and most likely to be included in any settlement. Lost wage replacement counts as compensatory damage, but it’s important to keep those apart when talking taxes. Calculating lost wage compensation results in a proven percentage of your settlement to exempt from taxes.
  • Punitive damages prove much harder to claim. The courts award punitive damages to punish those who’ve caused injury, in other words damages based on “pain and suffering“. In Tennessee the plaintiff must produce untarnished and convincing evidence that the defendant acted in a malicious, fraudulent, or reckless way. 

Are Personal Injury Settlements Taxable or Not?

Generally, the federal government does not require a plaintiff to pay income tax on compensatory damages or lost wages The settlement replaces a loss, making it a net gain of zero. Because of this calculation compensatory damages do not count as income. There are specific circumstances around injury and damages that qualify the gains as non-taxable. The American Bar Association outlines the rules here. It’s important to note medical expenses are tax-free, which include treatment for emotional, as well as physical, injury.

On the other hand, a payout for punitive damages equates additional income for the plaintiff. In the rare cases the courts award punitive damages to a plaintiff, that income could be taxed.

Examples of cases whose settlement usually avoid taxes:

  • Car wrecks: Save all receipts for work on your vehicle to prepare damage, as well as any medical expenses incurred not paid by insurance.
  • Slip and fall: Document your injuries and keep up with medical expenses, even those from alternative medical sources, like chiropractors or acupuncturists.
  • Dog bites and attacks: Same as slip and fall expenses.
  • Wrongful death
  • Product liability: Don’t forget to include the cost of the product that caused harm.


As part of your case, it is advised to not only hire a good personal injury attorney but also find a tax accountant who can keep you in compliance with current tax law. Otherwise, you may miss some important steps and need a lawyer for a completely different purpose later on.

For a free consultation on the legal side of personal injury law, contact McKeehan Law Group today!