Settling a personal injury lawsuit can bring some relief after a life-altering experience, but many people in St. Louis question whether they’ll owe taxes on that settlement. The short answer is: it depends.
Some settlement money is tax-free, while other parts may count as income. Knowing the difference can help you avoid surprises when tax season rolls around. That’s why our St. Louis personal injury attorneys have outlined some details regarding when a lawsuit settlement may be taxable.
Compensation for Physical Injuries or Sickness
In most cases, money awarded for physical injuries is not taxable.
This includes damages meant to cover:
- Medical bills
- Lost wages while recovering
- Pain and suffering from the injury
- Property damage up to the item’s original value
These payments are generally considered compensation for your losses, not income. Under both federal law and Missouri tax rules, they are not taxes, but you may still have to report this money when you file your taxes, so always check with a tax professional.
Lost wages from a physical injury are generally not taxable if they’re part of a personal injury settlement. The key is that the wages must be tied directly to a physical injury or illness. If they’re related to something else—like emotional distress without a physical injury or a discrimination claim—they are taxable.
Also, if the settlement specifically labels part of the payment as “lost wages,” that portion might trigger payroll tax reporting.
For example, let’s say you’re sitting in traffic when someone slams into your bumper at 40 mph during rush hour. You suffer a neck injury, miss several weeks of work, and rack up twenty thousand dollars in hospital bills. When your car accident case settles, you receive $50,000 to cover your medical expenses, lost wages, and pain from the injury. Because this money is tied directly to a physical injury, it isn’t considered taxable. You can keep the full amount without reporting it as income.
Emotional Distress Damages
Money for emotional distress can be tricky. If your emotional suffering is directly tied to a physical injury, like anxiety after a car crash, it’s usually not taxable. But if the emotional harm is unrelated to a physical injury, such as in a discrimination case, the IRS may count it as income.
Also, if you used your settlement to pay for mental health care and deducted those costs on a previous tax return, you may need to report that part of the money as taxable.
Punitive Damages Are Taxable
Unlike compensation for your injury, punitive damages are always taxable.
Instead of covering your losses, they’re meant to punish the other party for bad behavior. Because of that, the IRS treats them as taxable income, and you’ll need to report that part of the award when you file your taxes.
Missouri follows this rule, too. If your judgment includes punitive damages, be prepared to report that portion on your tax return.
Interest on Your Settlement
Sometimes a settlement includes interest, especially if it took a long time to resolve the case. Interest is always taxable, even if the rest of your settlement is not.
You’ll usually get a separate tax form for any interest you earn. That amount should be included in your annual income when you file taxes.
Reimbursement for Previously Deducted Medical Costs
If you deducted medical expenses on past tax returns and later got reimbursed through your settlement, that money could be taxable. The IRS considers it a “recovery of a deduction,” and it may need to be added to your income.
This doesn’t apply if you never deducted those costs or didn’t get a tax benefit from the deduction.
What Should You Do Before Tax Season?
Don’t wait until spring to figure it out. If you’re getting a settlement, ask your lawyer to break down exactly what each part of the payment is for, before you sign anything. How much is for medical bills? How much for missed work? Is any of it considered interest or punitive damages? That breakdown matters because the IRS won’t just take your word for it.
Contact our St. Louis Personal Injury Lawyers from Eason Car Accident and Personal Injury Lawyers for Help Today
For more information, please contact Eason Car Accident and Personal Injury Lawyers to schedule a free consultation with a personal injury lawyer in St. Louis, MO, today. We have two convenient locations in Missouri, including St. Louis and Richmond Heights.
We proudly serve St. Louis County and its surrounding areas.
Eason Car Accident and Personal Injury Lawyers – St. Louis Office
10 S Broadway #560
St. Louis, MO 63102
(314) 932-1066
Eason Car Accident and Personal Injury Lawyers – Richmond Heights Office
1034 S Brentwood Blvd Penthouse 1-C
Richmond Heights, MO 63117
(314) 463-4173