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Will I Be Taxed on My Personal Injury Settlement?

Downs, McDonough, Cowan & Foley Feb. 28, 2023

It seems like everything is taxed these days. If you get a raise a work, you pay more taxes. If you win the lottery, you pay taxes. If you inherit some money, you may pay taxes. Will you pay taxes on your personal injury settlement? It depends.  

You pursue a personal injury claim because someone else’s negligence has cost you, and they are legally responsible for paying you back. You have medical expenses, lost wages, pain and suffering, property damage, and more. Once you fight for a fair settlement, you wonder whether the government will take a chunk of it away from you.  

At Downs, McDonough, Cowan & Foley, LLC, we can help you understand when your personal injury settlement is taxable and when it is not. If you have been injured in Durango, Telluride, Pagosa Springs, or Cortez, Colorado, or anywhere in The Four Corners, we can help you obtain and keep your compensation.  

What Do the IRS and the State of Colorado Tax? 

The federal and state tax codes generally state that any income you make is subject to taxation. So, the question is, “Are personal injury settlements or jury awards income?”  

The Internal Revenue Service (IRS) and taxation laws in Colorado for personal injury claims do not consider settlements for physical injury claims to be income. Therefore, the general rule is that there is no taxation on personal injury compensation. However, there are exceptions to the rule.  

Personal injury claim settlements or civil jury awards may have multiple types of compensation. First, there is the compensation for actual damages arising from a physical injury or physical illness, which is generally not taxable. If your claim is based on emotional distress not arising from physical injury, such a settlement would be taxable income. For example, if you receive a settlement for a workplace harassment or wrongful termination claim.  

A third exception to the rule relates to punitive damages. A jury may award punitive damages in addition to compensation for the personal injury or illness. Punitive damages are awarded if the jury believes the actions of the negligent party were willful or intentional. Your personal injury attorney should ask that the awards for personal injury and for punitive damages be separated in the verdict and judgment to keep the taxable separate from the nontaxable.  

What Parts of My Personal Injury Settlement May Be Taxable? 

Other than an award for punitive damages, interest on a judgment may be taxable. If you settle a personal injury claim with the insurance company prior to filing a court case or prior to the jury’s verdict, the insurance company will compensate you as specified in the settlement agreement. That means you will receive your settlement relatively quickly once the claim is settled.  

If you file a lawsuit, there will be a judgment for the amount owed to you at the end of trial. However, it may take the negligent party and its insurer time to pay the judgment in full. The judge may therefore include a provision for interest to be paid by the defendant until the judgment is paid in full. While the principal amount, excluding punitive damages, is not taxable, any interest paid to you is.  

What Personal Injury Damages Are Not Taxable? 

Non-taxable personal injury damages include compensation for medical expenses, lost wages and income, pain and suffering, and loss of consortium. Remember that there is an exception for emotional distress compensation when it is unrelated to a physical injury or illness which makes such compensation taxable. However, there is no taxation of emotional distress compensation if the distress is related to your physical injuries.  

You will need to pay your attorney a contingency fee and case expense reimbursement from your settlement. You pay no taxes on either of those as well.  

Speak With an Experienced Attorney 

Under some circumstances, how you structure a personal injury claim or lawsuit may make the difference between receiving taxable or nontaxable compensation. Experienced personal injury attorneys, like us, know that getting a settlement is not always about what you receive, but what you keep. We will help you keep as much of your settlement or jury award as possible.  

If you have been injured in Durango, Colorado, or anywhere in The Four Corners, call Downs, McDonough, Cowan & Foley, LLC today to schedule a time to discuss your case. There is no charge for that consultation either.