Is a Personal Injury Settlement Taxable?
As a general rule, the compensation received in a personal injury claim is not taxable. No taxes are owed as long as the money is for a personal injury or illness caused by someone’s negligent, reckless, or intentional acts.
However, any money you receive that is not strictly part of the personal injury settlement may be taxable. For example, some states impose tax on any interest that accrues on your personal injury award.
Any punitive damages that you are awarded are also taxable. In addition, compensation for emotional distress is fully taxable unless you can show that the emotional injury was accompanied by physical harm or distress.