Personal Injury Claims: Punitive Damages are Taxable Income in Most Cases

by Marco L.

According to the US IRS, regular compensatory damages that you receive for personal injury are not taxable. The typical personal injury claim results in such a settlement, or compensation. The settlement is not considered income or “betterment”, but merely restores the injured person to the position he was in prior to the accident.

However, since the 1996 amendment of tax codes, the US IRS does consider punitive damages to be income and thus taxable in most cases. This is because punitive damages are a punishment to the wrong-doer, and not compensation to the injured person. Interest paid on any legal settlement or court award is also considered taxable income. Structured settlement or annuity interest is not. Compensation for lost wages or lost profits is also income in most cases. Given the complexity of the issue, it is wise to consult a tax advisor or attorney if you have any doubts as to whether or not you need to report your personal injury claim settlement or court award to the IRS.

This article is written for informational purposes and is not intended to take the place of competent local legal counsel.

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