How did the Taxable Code look at Personal Injury Awards & Settlements?

Awards from personal injury claims were non-taxable before the tax code was amended in 1996 and thereafter in 2017 when the Tax Cuts and Jobs Act was passed by Congress. The Act alleviated the tax burden for most Americans, but not for personal injury plaintiffs.

Besides the subject of taxation, did you know that you should be compensated for the loss resulting from the negligent acts or omissions of another party? Most people hire the Wasilla car accident attorney to pursue justice on their behalf as they concentrate on recovery. So how is taxation applicable to personal injury awards?

Taxation of Personal Injury Claims Awards

1. Awards for Physical Injury are Tax-Free

Recoverable damages for physical injuries are non-taxable according to the federal tax code, Section 104. Personal injury claims involving physical injuries include car accidents, product liability, slip and fall cases, and others.


X’s leg is injured in a car accident caused by Y and the doctor prescribes medication. X misses 3 weeks of work thanks to the injury and the follow-up doctor’s appointments. Fortunately, X’s claim is settled by Y’s insurer for $500,000. The award recovered by X will be tax-free because the compensation is related to their leg injury.

Recoverable damages associated with physical injuries, including pain & suffering, property destruction, medical expenses, lost wages, and lost capacity for earning are non-taxable. Whether compensation is received as a lump sum or in installments, or whether the case is resolved out-of-court, the award is tax-free.

2. Non-Physical Injury Damages Are Taxable

Awards for non-physical injuries are considered income and must be revealed to the Internal Revenue Service for taxation. For instance, if you lose a car accident claim and you sue your attorney for bad legal counsel (professional malpractice) the damages you receive are taxable. Although the malpractice claim relates to your car accident claim, the malpractice claim didn’t result from the physical injuries but from the lawyer’s bad advice.

3. Emotional Damages Are Taxable

Emotional injuries are subjective and have no physical symptoms although they cause emotional trauma. The tax provisions of the federal law specify that awards recovered for emotional injuries and mental anguish are taxable.

For illustration, we’ll slightly change the facts of X’s accident: X watches a friend hit by Y’s car and injured seriously. X becomes mentally unstable thereafter and suffers other health complications, such as migraines and insomnia. If X files a claim against Y for their negligence and recovers damages, the award will be subjected to taxation because it’s considered an income.

4. Medical Expenses Are Tax-Free

Awards for medical expenses are tax-free whether they’re meant to compensate the plaintiff for emotional suffering physical injuries, or both.

Medical expenses refer to costs associated with treating, diagnosing, curing, mitigating, or preventing a disease–according to the IRS.

5. Punitive Damages Are Taxable

Punitive damages are awarded to punish the accused for their bad conduct and to discourage such wrongs in society. Awards for punitive damages are taxable because they’re considered an income, unlike compensatory damages.

6. Post-judgement Interest is Taxable

Post-judgment interest accrues after judgment is passed until when the accused pays damages; this interest is called post-judgment interest and it accrues even in non-taxable awards.

 Post-judgment interest is taxable. And like punitive damages, just like in the case of punitive damages. Interest accrues only after trial and the rate of interest varies by jurisdiction.

7. Legal Fees are taxable

This hurts because your lawyer’s fee is considered a part of your gross pay–meaning the total recoverable amount is taxed on the client, including what the lawyer gets.

The majority of personal injury attorneys work on a contingency basis–meaning they get paid after the conclusion of a case. Insurance companies send the check to the lawyer who deducts their dues (fees and other costs) and sends you the balance.


If you recover $500,000 for a car accident claim and the lawyer deducts $200,000 as legal fees, you will pay tax on the whole amount–$500,000.

The ambiguity between Non-taxable Awards for Physical injury and Non-taxable Emotional Awards

The distinction between non-taxable awards for physical injuries and taxable awards for emotional anguish is unclear and ambiguous.

The provisions of the IRS state that the “symptoms” of emotional anguish, such as migraines and insomnia are no injuries but effects of emotional suffering but courts complicated the situation further by stating that serious consequences of emotional suffering can worsen physical injuries.

The IRS said that physical injuries should be physically observable, and with some degree of physical harm, such as a bruise, a cut, and others–it was further argued that a back injury or any other soft tissue injury is not observable hence, not a physical injury.

You should consult a personal injury lawyer who understands the basics of tax law because their knowledge will be helpful when dealing with tax issues.

Ammad Ahmad

“Ammad Ahmad is a writer, SEO expert, and admin of the A professionally trained blogger, ammad has spent the last decade reading and writing about the latest news giving her characters a palpable spark! His latest work is the sequel to her debut blog, the tech virtual. You can contact with me at"

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