Often people wonder whether any money recovered from a personal injury lawsuit is subject to state and/or federal taxation. The answer is…it depends. There are a multitude of factors that will help you understand how personal injury settlements are taxed.
The type of monetary damages obtained via a settlement or awarded via a jury trial
Whether you have deducted certain medical expenses from your taxes that relate to the bodily injuries you endured from the accident
Whether you were awarded punitive damages
Generally, money awarded from a personal injury settlement or jury verdict is not subject to taxation. However, this only applies to the compensatory damages you receive as restitution for the expenses incurred as a result of your bodily injuries or physical illness. The rationale for generally excluding compensatory damages is that these are paying you back for the damages you were forced to incur.
In most cases punitive damages are subject to taxation. Punitive damages are paid by a defendant as a form of punishment when it is determined that their conduct was especially offensive. The objective of this type of award is to effectively "make an example" of the defendant and hopefully deter other individuals from engaging in similar conduct.