If you are receiving wages from an employer, you are familiar with taxable income. But what about income that is received as a result of a personal injury settlement? One of the biggest questions you might have is in regard to future earnings.

“Did you know you don’t have to pay taxes on your personal injury settlement? That applies to compensation for future earnings, too. There are exceptions, but most personal injury settlement money including lost future earnings are meant to restore what you have lost so the IRS does not consider your settlement taxable income. This applies to state income taxes in Missouri too, but do your due diligence because there can be some exceptions and state laws differ.”

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Gary Burger

Litigation Attorney

According to the IRS, the compensation that you receive for future earnings in a personal injury claim is not subject to taxes. This is specific to a personal injury claim. Other income from claims related to employment, wrongful termination, etc, might be taxed. It is advisable to speak with a personal injury attorney to learn more about taxable income versus income that is exempt.

Can a Personal Injury Settlement be Taxed at the State Level?

Although most compensation and income from a settlement are not taxable at the federal level, what about taxes at the state level? While certain states might charge income taxes when you receive money from a personal injury settlement, this income is tax-exempt in the state of Missouri. The reasoning behind this is that the money you receive from a settlement is intended to compensate you for the losses that you experienced and is not categorized as income. Typically, this is not income that you will need to claim when you are filing your taxes, but it is always advisable to double-check this with a knowledgeable attorney or tax professional.

Exceptions to Non-taxable Compensation

While compensation received in the event of a personal injury claim settlement for a physical injury is not taxable income, it is important to understand that some claims might be subject to federal and or state taxes. If you have received a settlement for a non-physical injury or punitive damages such as emotional distress or damages to your reputation, these might be considered taxable income at both the state and federal levels.

Additionally, some personal injury settlements might be structured in a way in which the compensation is paid out over a predetermined period of time versus in one lump sum. In these cases, the tax implications can depend on the terms of the structured agreement. As always, it is a good idea to speak with an experienced attorney to learn more about what compensation and income are and are not taxable after a personal injury settlement.

Why is it Important to Know About Injury Settlements and Taxes?

A personal injury settlement is meant to provide compensation for those who have suffered losses or injuries due to the negligence of another party. These could include lost income, financial compensation for pain and suffering, medical bills, physical therapy, and more.

The last thing you need after the relief of receiving a settlement is an unexpected tax bill eating into your financial recovery. Paying unnecessary taxes or not realizing possible tax implications can hurt your future – both mentally and financially. You should know what to expect from the very start of the process. Always consult a St. Louis, MO, personal injury attorney, and they can answer many different questions.