Are Damages Awarded from a Pennsylvania Personal Injury Claim Taxable?
In general, damages awarded from a Pennsylvania personal injury claim are not considered taxable income under state or federal law. This means that you typically will not have to pay taxes on compensation, but there are some exceptions.
Types of Personal Injury Compensation That Is Subject to Taxes
There are some types of compensation from a personal injury lawsuit that you may have to pay taxes on. These include:
- Lost Wages: If you receive compensation for current and/or lost income as a result of your personal injury, this compensation is generally considered taxable income similar to normal wages on a paycheck.
- Punitive Damages: Punitive damages are sometimes awarded to punish the defendant (at-fault party) for particularly egregious behavior. However, punitive damages are typically taxable at the federal level.
- Interest: You may be awarded interest on top of a judgment or settlement, which is generally taxable.
- Emotional Distress: If you receive compensation for emotional distress or mental anguish, this compensation may be taxable if not related to a physical injury or illness.
- Attorney’s Fees: If your settlement or judgment includes attorney’s fees, you may need to pay taxes on them. However, the fees may be tax-deductible if your attorney is paid separately from the settlement or judgment.
- Medical Bills (in some cases): If a portion of your settlement is for medical bills that you made deductions for in prior year(s), resulting in a tax benefit, then you will owe taxes on that compensation. If part of your settlement is for medical expenses across multiple years, you will have to pay pro-rata taxes on the total amount of medical expenses being reimbursed for each year they were listed as deductions.
A tax professional can help you navigate the complex laws related to personal injury claims and ensure that you are in compliance.
What Portions of My Settlement or Award Are Not Taxable?
If you did not take any deductions on your tax returns for injury-related medical expenses, then the compensation you recover for your medical bills is not taxable income.
The compensation you recover for any property damage is not taxable income unless the amount you receive exceeds the property’s adjusted basis (net cost of an asset). In that case, taxes must be paid on the excess amount.
Pain and Suffering
The compensation you are awarded for your pain and suffering, and other non-economic losses related to a physical injury or illness you suffered, is not taxable.
Lowering Your Tax Obligations
To lower your tax obligations related to a personal injury case, consider a structured settlement. This means you receive payments from the settlement over time rather than in one lump sum. This can help you avoid a large tax bill in a single year and may also provide other benefits such as ongoing income and protection from creditors. However, it is important to consult with a financial professional before making any decisions about structuring your settlement.