Is a Personal Injury Settlement Taxable in Philadelphia?

As we all know, the Internal Revenue Service likes to get its piece of every bit of income you make. The question, is a personal injury settlement taxable, often comes down to whether money or assets you receive is "income." The IRS defines income as compensation for services, including wages, fees, commissions, and similar items.

The IRS also expressly excludes lots of what may feel like income from the definition of gross income, including, among other things, life insurance proceeds, gifts, inheritances, and proceeds from personal injury lawsuits. So, the simple short answer is no; your personal injury award is not taxable. Pennsylvania and New Jersey also generally exclude personal injury awards from taxable income with an exception in income taxes.

On a mustard yellow background TAXABLE INCOME! is written in black handwriting, above a silver tipped, back rubber grip pen, posing the question, Is a personal injury settlement taxable in Philadelphia?

Parts of Your Award May Be Taxable in PA

When you're asking is a personal injury settlement taxable, know that parts of the money you receive in a personal may be taxable. Taxable items include:

  • Payments from a disability policy would not be tax-free if you deducted the premiums you paid for the policy.
  • Medical expenses for which a deduction was claimed that are reimbursed in the award will be deemed taxable income when reimbursed
  • Lost wages covered by the settlement that would have been taxable as ordinary income in the first place will be taxable to the extent included in the award.
  • Any front or back pay that is included in the award will be treated and taxed as wages and will be subject to income and payroll tax 
  • Any interest paid on the award for whatever reason is also taxable income.
  • Most significantly, because they can be the most significant part of the award, any punitive or exemplary damages are generally taxable.

How the Type Makes a Personal Injury Award Taxable or Tax-Exempt

Whether your injury was physical or non-physical can make your physical injury award taxable or tax-exempt. Interestingly, the exclusion of the settlement from income only applies to physical injuries, except for pain and suffering caused by a bodily injury. Damages resulting from other kinds of injuries such as illegal discrimination or emotional distress caused by something other than a physical injury will be taxable income. So, when asking is a personal injury settlement taxable, yes, suffering a physical injury and/or pain and suffering as a result of physical injury can make your personal injury award taxable.

How the Award Is Reported for Tax Purposes in PA

If any portion a personal injury award is taxable, you will be required to report the entire gross amount of the personal injury award taxable as income. You may not reduce the total for the share that went to your attorney. In other words, if the taxable portion of your award was $100,000 and your attorney received $33,000 of it, you are still required to report $100,000 as taxable income.

When determining is a personal injury settlement taxable, here might be some exceptions to this latter rule if the injury arose from your business or illegal discrimination. If you received interest in the settlement, that interest is reported as Interest income, while punitive damages are reported as Other Income.

Pennsylvania Tax Laws for Structured Settlements

Tax laws relating to structured settlements are meant to encourage their use in the settlement of personal injury cases.  These settlements are given preferential treatment because they provide long-term financial security to the recipient and reduce future reliance by the recipient on public assistance. However, the favoring of structured settlements does not apply to any punitive damages or other money that would have otherwise been taxed included in the settlement.

Structured settlements for physical injuries are set up to make payments over time instead of in a lump sum. This structure has to do with how the settlement is structured (usually through an annuity). Interest accumulated on the payments may be converted to non-taxable through that structure.

Do I Have to Pay Taxes to Pass On or Sell My Settlement?

Since 2001, beneficiaries receive an inherited structured settlement by presenting claim information to the company paying the settlement. If the settlement was tax-exempt previously, it would not make the personal injury taxable to the new recipient.  Recipients can also sell their structured settlements tax-free so long as there is no change to the underlying contract. Finally, a structured settlement can also be given as a gift to a third-party tax-free, so long as the underlying contract terms remain in place. However, it is essential to note that the gift cannot be revoked.  Gifts, therefore, should be undertaken with a great deal of thought.

Is a Personal Injury Settlement Taxable in Philadelphia?
Call Us to Speak with a Philadelphia Personal Injury Attorney

Taxes on personal injury awards can vary from the nature of the injury, the structure of the payment, to whether any tax deductions have been made. The question of is a personal injury settlement taxable or not will be specific to you. If you aren’t sure about the tax status of your personal injury award or are have other questions about a claim, contact the law offices of John Mattiacci, a Philadelphia attorney concentrating his practice in personal injury for clients in Pennsylvania and New Jersey. 

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