A common question plaintiffs ask is whether they are required to pay taxes on the money they receive to settle a claim for personal injuries. The answer is generally no, and the reason for the rule is relatively simple. The IRS does not count compensation for personal physical injuries or physical sickness as income.
Look at it this way: if you own a house worth $100,000, and that house is lost in a fire, then the compensation you receive from your insurance company to replace the house should not be considered income. The purpose of the insurance proceeds is to replace what you lost, or, put another way, to make you whole again. Therefore, it should not be taxable.
This same principal applies in a personal injury case. If you break your leg in an automobile accident and you recover money to compensate you for your related injuries, then the money is not income because it is not making you better off than you were before the accident. The IRS treats damages for emotional distress related to personal injuries or sickness the same way.
As with any rule, there are some exceptions that you should ask your lawyer about. However, the general rule that will apply in most cases is that a personal injury settlement is not considered income and is, therefore, not a taxable event. For more information on this subject, visit the IRS website. https://www.irs.gov/pub/irs-pdf/p4345.pdf.
This article is not legal advice but should be considered as general guidance in the area of personal injury law. You can contact us at 207.784.3200. Skelton Taintor & Abbott is a full service law firm providing legal services to individuals, companies, and municipalities throughout Maine. It has been in operation since its founding in 1853.