How Much Tax Is Paid on Lawsuit Settlements


When you’ve been injured in an accident caused by someone else’s wrongdoing, one of your goals is to obtain compensation from the at-fault party. Sometimes that comes in the form of a settlement, sometimes in the form of an award ordered by the court. Once you get that compensation, you’ll be eager to pay the unpaid bills that have been hanging over your head while your case was pending.

But wait. How much of that settlement do you actually get? You know your lawyer gets a cut. Does Uncle Sam get a cut, as well? In some limited circumstances, yes. Depending on your situation, your compensation could be considerable, and trying to figure out your new financial and tax obligations can be a monumental task.

How Are Settlements Taxed?

According to the Internal Revenue Service (IRS), all income you receive from judgments or settlements is taxable unless otherwise exempted. Luckily, the exemptions found in Section 104 of the Internal Revenue Code (IRC) apply to many of the most common personal injury lawsuit settlements and judgments. Specifically, the IRS exempts the following three types of income from your overall income tax obligations:

  • Payments from health insurance companies for medical expenses
  • Payments from an employer or former employer through their worker’s compensation plan
  • Settlements received as a result of physical injuries or sickness, excluding punitive damages.

Money from resolved personal injury cases is not only generally not taxable, but it also does not bump you up into higher tax brackets.

Why Are Settlements Not Taxed?

It sometimes seems like the IRS made the tax system complicated on purpose, and you may still worry that a large tax bill is lurking around the corner. Understanding why settlements are not taxed can help ease your mind.

Money can’t buy happiness, and it also can’t erase the pain and suffering you endure from a serious accident. But the goal of a settlement or award in a personal injury case is to ‘fix’ the injustice you suffered and make up for your losses.

If you earn $75,000 in income this year, the government will expect you to pay taxes on that money (with a few exceptions, such as standard deductions and reductions for interest on home loans, etc.). The $75,000 is new income that you created and earned over the course of the year. On the other hand, the IRS does not consider settlements as income. A settlement worth $250,000 balances out your personal injury, which was a loss of $250,000, as the IRS sees it.

Is 100% of a Settlement Tax-free?

To add to the confusion, some aspects of settlements might be taxable. The IRS exemptions only specify “physical injuries and illnesses” and therefore do not mention compensation received due to emotional pain. However, mental conditions can manifest into physical ailments, and that aspect of the settlement might be tax-free. For specific details, ask an experienced personal injury attorney. They’ve handled hundreds of cases similar to yours and will know all about what’s taxable and what isn’t.

Furthermore, if a judge or jury awards you punitive damages, that money is taxable. Punitive damages are not compensation for your suffering, injury, or losses. They are, instead, a penalty against the at-fault party for their misbehavior. That makes this money subject to taxation.

New Jersey Punitive Damages

Not all states allow for punitive damages in personal injury lawsuits, but New Jersey does. Punitive damages are awarded by a judge or jury to punish a defendant or prevent them and others from repeating the same behavior in the future. However, punitive damages are not usually awarded, and they are difficult to obtain. A plaintiff must show, through clear and convincing evidence, that the defendant’s actions were malicious or willful and wanton to claim these damages. If you receive punitive damages, the maximum amount allowable by law is $350,000, or five times the amount of compensatory damages, whichever is greater.

Punitive damages are taxable and have the potential to influence your tax bracket.

Contact a Personal Injury Attorney Today

At Brach Eichler Injury Lawyers, our New Jersey personal injury attorneys have won millions of dollars for our clients and walked them through the process of receiving and using their settlement or award. Instead of worrying about settlements, trials, and tax hypotheticals, you should focus on making a good recovery following your injury and let us handle the details of your case.

Our consultations are free, and we don’t get paid unless we win you money. Call us today at (973) 364-8300 or contact us online to start the process of getting the compensation you need to get your life back on track.


Written by: Brach Eichler Injury Lawyers Last Updated : May 9, 2023


Speak With a Skilled Auto Accident Attorney

If you have been involved in a motor vehicle accident, call us. We are here for you. The consultation is Free. You will not pay any fees unless we win your case, because here at Brach Eichler Injury Lawyers, it's all about getting results for you.

Our Verdicts & Settlements

  • $5.8 Million Settlement Brach Eichler Injury Lawyers Obtained a $5.8 Million Settlement on Behalf of Injured Client
  • $5.35 Million Settlement Brach Eichler Injury Lawyers Obtained a $5.35 Million Settlement at Trial on Behalf of a Pedestrian Struck by a Tractor Trailer
  • $4.8 Million Settlement Brach Eichler Injury Lawyers Obtained a $4.8 Million Settlement on Behalf of a Woman Injured in a Trucking Accident
  • $2.25 Million Settlement Brach Eichler Injury Lawyers Obtained a $2.25 Million Settlement for an Auto Accident Victim in Bergen County

* Results may vary depending on your particular facts and legal circumstances.

View All Results

Meet Our Trial Attorneys

The trial attorneys at Brach Eichler Injury Lawyers have decades of experience with personal injury litigation. We understand the difficulties accident victims experience. Our staff is especially skilled at dealing with medical providers and insurance companies to navigate these claims and allow you to focus on what is truly important - getting back to health.

What Our Clients Are Saying About Us

  • "My case was not a simple case, but Ed Capozzi and his team took it head on. It was a pleasure to deal with Ed Capozzi and Corey Dietz. All their knowledge and fast response to any questions I had throughout the case made it easier on me. I can’t forget about Mr. Capozzi’s wonderful paralegal. Everybody was kind and thoughtful. This team of attorneys never made me feel like I was just another case. They make you feel like friends. If you need an personal injury lawyer, give Ed Capozzi and Corey Dietz a call! They won't let you down! Thanks to everyone at Brach Eichler Injury Lawyers! You guys rock!"

    Matt Wislocki
  • "I would never choose another law firm!! Mr. Edward Capozzi and Valentina treated me like family. I was scared to go to court but when I did, he was very aggressive and fought for me. I got so much money for my case!! I can't say it enough, THANK YOU!! THANK YOU!!"

    Margarita C.
  • " Brach Eichler Injury Lawyers is a top notch law firm. I worked specifically with Mr. Capozzi, and was very impressed with his knowledge of personal injury law, and his commitment to ensuring I got the result I deserved."

    Stephen Quigg

* Results may vary depending on your particular facts and legal circumstances.

  • Best Lawyers
    Best Law Firms US News
    American Association for Justice
    Topverdict.com Top 50 Settlements logo
    Best Attorneys of America
    Super Lawyer

Speak to an attorney today!

If you have been injured in an accident, call us! We are here for you 24 hours a day. The consultation is free. You will not pay any fees unless we win your case, because here at Brach Eichler Injury Lawyers, it is all about getting results for you.

Call Email chat