Taxes on Personal Injury Settlements

One of the most frequent questions we get when we settle cases for our clients is whether the money our client receives is taxable. In injury cases, most settlements are not taxable. The IRS has declared that all damages that stem from a person injury do not have to be declared on your taxes. That means that all the money you receive, no matter what it’s for, is tax-free. Even if you receive lost wages as part of your settlement, you get that money tax-free.

One of the only times we worry about taxes with personal injury settlement is when the insurance company requests a confidentiality clause. This is something where after you settle, you’re not allowed to tell anyone about the settlement. In a famous case involving Dennis Rodman (yes, that Dennis Rodman), the IRS determined that any payments for confidentiality are taxable.

This creates a situation where an otherwise tax-free payment could be deemed taxable because it includes a confidentiality clause. So, when confidentiality clauses are necessary, we always make sure to craft them in a way that eliminates that the IRS will be looking to get a portion of your tax settlement. A little extra work ends up saving our client the headache when they file their taxes.

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