Personal Injury Proceeds Generally Not Taxable
If you have been injured in a car crash, slip and fall, assault, dog bite or any other type of personal injury claim, the money paid to you, by either judgment or settlement, is not taxable. This applies to money you receive for medical bills and expenses, lost income and for pain and suffering. Both the federal government and Oregon impose no taxes on money paid due to a personal injury claim.
However, your injury must be physical, such as cuts, bruises, muscle strain or sprain, broken bones, soft tissue injury, sickness or any physical conditions verified by a qualified doctor. A purely emotional distress claim will be taxed.
If there is any doubt about whether your settlement is tax free, it is best to consult with an accountant or tax attorney before you start arguing with the IRS.
If your claim is filed in court and then settled, what is alleged in the complaint could be dispositive on how the IRS treats your settlement money. For example, if you sued for sexual harassment and did not allege any physical injury in your complaint, the money you received would be taxable as income to you.
In drafting a settlement agreement of a complaint that has a mix of taxable and non-taxable claims, your attorney should be able to draft a settlement agreement that allocates the settlement proceeds to those counts or claims that are nontaxable. Usually, the other side will not object.
The nontaxable treatment of personal injury money also applies to structured settlements, where you receive annual payments over a period of years instead of one lump sum.
Whether your injury money is taxable can sometimes affect your decision whether to settle a personal injury claim. Knowing that the amount you receive is fully yours and not taxable adds value to the settlement. It also reduces stress around tax time.