A personal injury settlement protects victims from the financial consequences of someone else’s negligence and is usually exempt from taxation. However, there are some situations in which the IRS requires you to claim an insurance award on your tax returns. Knowing whether a portion of your settlement is subject to taxation will help ensure you’re fairly compensated for your losses.

What Portions Are Tax-Free?

As a general rule, any funds related to an illness or injury caused by someone else’s recklessness aren’t subject to taxation. This includes payments for medical expenses, lost wages, pain and suffering, and attorney fees. However, if you paid off and deducted medical expenses in a previous year, you will have to claim and pay taxes on that portion of your injury settlement.

What Are the Taxable Portions of a Personal Injury Award?

Most states allow accident victims to ask for interest on the amount owed, calculated from the initial filing to the settlement date. While the bulk of a personal injury award may be exempt from taxes, you are required to claim interest payments on your returns.

Some states allow accident victims to demand punitive damages, which are solely intended to punish negligent behavior. Because these funds are not based on the costs of your illness or injury, punitive damages are always subject to taxation.

If you or a loved one has been injured due to someone else’s carelessness, the personal injury attorneys at Miraldi & Barrett, Co. will strive to recover the compensation you deserve. Since 1949, this law firm has served accident victims throughout Lorain County, OH, providing award-winning representation and consistently earning the title of Ohio’s Super Lawyers. Visit their website to see the types of cases they handle, get more legal tips on Twitter, or call (440) 233-1100 to schedule your initial consultation.