UPDATED SEPTEMBER 12, 2023
As New Jersey attorneys who represent those injured in accidents, we are frequently asked, “If I settle my personal injury case, do I have to pay taxes on the settlement?”
As New Jersey attorneys, we cannot give anyone tax advice. But generally speaking, a settlement or jury award for damages in a personal injury case is usually not taxable.
Historically, settlements and jury awards in personal injury cases were mostly tax free, but there were significant grey areas. The Small Business Protection Act of 1996 added IRC Sec 104(a)(2) to the Internal Revenue Code changed the landscape for the taxation of settlements and damages. The new section made a small but significant change by limiting tax-free treatment as a result of personal “physical” injuries and “physical” sickness. The final regulations apply to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after January 23, 2012. IRC Sec 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. This is good news for most people, since most plaintiffs in personal injury cases are seeking damages for their pain and suffering.
But you should note that not all portions of a personal injury settlement or jury award are considered compensation for pain and suffering from the personal injury. For example, some plaintiffs are entitled to an award for past or future lost wages, reimbursement of medical bills, costs for future medical treatment, property damage, etc. In such cases, the tax implications could become complicated and we advise our clients to consult with their accountants for tax advice.
Remember, the insurance companies have teams of lawyers working hard to protect the rights of their insureds. They will often make a host of arguments to avoid compensating people who were injured through no fault of their own. If you have any question or you or a loved one were injured in an accident, please do not hesitate to contact us for a 100% free consultation.
Raff & Raff, LLP
Attorneys at Law
30 Church Street
Paterson, NJ 07505
Tel: (973) 742-1917
Fax: (973) 742-2454