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Are Settlements From Personal Injury Taxable - SavingAdvice.com Blog
Non-Taxable Categories:
- Medical expenses
- Lost wages due to physical injury
- Pain and suffering from physical injury
Taxable Categories:
- Interest earned on the settlement amount
- Punitive damages
- Emotional distress not related to physical injuries
Distinguishing Between Physical and Emotional Injury Compensation
Physical injury compensation is generally non-taxable. It includes medical expenses, pain and suffering, and lost wages directly tied to the injury. Emotional injury compensation, if not linked to a physical injury, is taxable.
IRS Regulations and Personal Injury Settlements
The IRS stipulates clear guidelines on what portions of a personal injury settlement are taxable. They define “observable bodily harm” as a criterion for non-taxable compensation. Amounts paid specifically for medical care or treatment are exempt from taxes.
Punitive damages are always taxable, regardless of the nature of the injury. It’s also essential to report any interest earned on the settlement, which is considered taxable income.
