I Received a Personal Injury Settlement Last Year – Is it Taxable?

With the deadline for filing your 2014 federal income tax return a little more than a month away, if you received proceeds from the settlement of a lawsuit during that tax year, you need to know if you must include the award as income.

Personal Injury Settlements

According to the IRS, if you receive a settlement for personal injury or physical illness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount of your settlement is non-taxable. In other words, don’t include it as income on your tax return.

But, if you did deduct a portion of the settlement for medical expenses in a prior tax year, that portion must be included as income. If part of the proceeds is for medical expenses you paid in more than one year, you are required to allocate, on a pro rata basis, the part of the proceeds to each of the years the medical expenses were paid.

Emotional Distress or Mental Anguish

Any award you may have received for emotional distress or mental anguish from a personal injury is treated the same as proceeds received for personal injuries or physical illnesses.

However, if the award you received for emotional distress or mental anguish did not arise from a personal injury or physical illness, it must be included as income, although attributable medical expenses can reduce the amount you must claim.

Lost Wages

If you receive a settlement in an employer-related lawsuit, the portion of the proceeds for lost wages (front pay, back pay, severance pay) is taxable income and should be reported on you income tax return.

Punitive Damages

Punitive damages are taxable and should be reported as “Other income,” even if they were awarded in a personal injury settlement.