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Is Your Personal Injury or Workers' Compensation Settlement Taxable? Here Is Some General Information.

With the dawn of a new year, it is never too early to begin thinking about the inevitable: taxes.  Although the IRS generally takes an all-inclusive approach to taxation, awards falling under Workers' Compensation or for personal injury are the exception.  Awards received as workers' compensation for an occupational injury or sickness are fully exempt if paid under a workers' compensation act or statute in equivalent nature of the act.  This exemption is extended to your survivors.  However, retirement plan benefits received based on age, service, or prior plan contributions are includable as income, even if occupational injury or sickness was the prevailing reason for retirement.  Any damages from a personal physical injury or sickness are excludable as well, including wage loss stemming from the injury.  Punitive damages are not exempt, however.  Awards for emotional distress or mental anguish are excludable IF they originate from the personal injury or sickness; otherwise they will be treated separately and includable in personal income.  Interest associated with a settlement or award will always be taxable.  These are just a few broad helpful tips.  Depending on your individual situation, other rules may factor in when determining what to include in taxable income.  Please discuss all in-depth tax concerns with a CPA or tax attorney.   

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