Receiving a personal injury settlement can bring financial relief after an accident. However, you might wonder whether you owe taxes on that money. Understanding how Florida and federal tax laws apply to personal injury settlements can help you plan accordingly.
Compensation for physical injuries
In most cases, compensation for physical injuries or illnesses is not taxable. This includes payments for medical expenses, lost wages, and pain and suffering. The IRS considers these damages as reimbursements rather than income, so you typically do not need to report them on your tax return.
However, if you previously deducted medical expenses related to the injury, you may need to include part of the settlement as taxable income.
Punitive damages and interest
While compensation for actual injuries is not taxable, punitive damages are. Punitive damages punish the responsible party rather than compensate for losses, making them taxable under federal law. Additionally, if your settlement includes interest, that portion is also taxable. Interest may accrue if there was a delay in receiving your payment or if it was awarded as part of a court decision.
Emotional distress and non-physical injuries
If you receive compensation for emotional distress or mental anguish not caused by a physical injury, it may be taxable. The IRS treats these damages as taxable income unless they are directly linked to a physical injury or illness. To determine whether your settlement includes taxable damages, review your settlement agreement and consult tax guidelines.
What to consider when filing taxes
When filing your taxes, you may need to separate taxable and non-taxable portions of your settlement. Keep detailed records of medical expenses, settlement agreements, and any tax deductions you previously claimed. If a portion of your settlement is taxable, setting aside funds for taxes can help avoid unexpected liabilities.