judge's gavel on cash indicating question about taxes on legal settlements
  • “Do I have to pay taxes on legal settlements?”
  • “Will my legal settlement affect my tax return?”
  • “Is a legal settlement tax exempt or tax deductible?”

At Brooks Law Group, we hear the same questions repeatedly from clients who have won their cases.

We know these are important questions, and they are especially pertinent at this time of year. Winter Haven residents are heading into the final stages of tax season and are wondering what their recently awarded settlement will mean when filing. Ultimately, we advise our clients to seek the advice of their CPA or tax professional to avoid costly mistakes and make the best decisions for their own unique situations. Like many areas of the law, the answers to the above questions vary. However, some generalities to keep in mind are included below to guide you as you look for the answers you need.

judge's gavel on cash indicating question about taxes on legal settlements 2

Taxation of personal injury damages?

Personal injury damages are the funds you receive to compensate you for

  • lost wages
  • medical bills
  • emotional distress
  • pain and suffering
  • harm to family relationships
  • and attorney fees following an accident.

In most cases, these types of settlement payouts are NOT taxable.

Parts of your settlement can be subject to taxation, although it depends on the details of your case and your payout.

Tax-free compensation is usually related to

  • physical injury or ailment
  • emotional distress
  • medical expenses
  • or lost wages.

However, if a breach of contract caused your injury, and this is the basis of your claim, then parts of your awarded damages are (usually) taxable.

Any interest you earn for the time the case has been pending is taxable.

If you receive compensation for emotional injury only, it is taxable unless you can prove at least some minor amount of physical injury.

Taxes on legal settlements? Consult a CPA to be on the safe side

Once you know whether or not your settlement is taxable, it’s time to have a conversation with your CPA. How you structure your IRS filing in the coming years is best sorted by them. They can help you make educated decisions that will best benefit you long-term. They will try to shield you from unnecessary taxes to the extent allowed by law. They’ll also try to shield you from having to pay any penalties or interest by notifying the IRS of your award when required. It’s important to note that the IRS will generally have access to your settlement information because the insurance company submits a 1099 form for your claim upon completion.

Work with competent attorneys you can trust

Having an attorney that understands the need to arrange tax requirements related to your settlement is key to feeling confident following your case. Brooks Law Group is experienced in working with insurance companies and tax professionals. This helps us to best serve our individual clients in the ways they need most. If you don’t have a CPA or tax professional already, we have an extended network of trusted sources in the Winter Haven area. They can advise and support you following your settlement. This will help you make wise choices and protect you from unnecessary consequences down the line.

If you or a loved one have been injured and are seeking compensation and justice for yourself and/or your family: Call us for your FREE consultation. For lawyers who care, Look to Brooks.

Steve was born in New Orleans, Louisiana. As was the practice for new doctors his father worked day and night during his medical residency at Charity Hospital there. Steve comes from a long line of doctors. His father, his grandfather, his great grandfather, even two uncles were all specialists and/or surgeons in their chosen medical specialties, including internal medicine specialist, obstetrics / gynecology, neurosurgery and general practice / surgery. His great-great grandfather was the Surgeon General of Ohio during the Civil War.