Minnesota generally follows federal law regarding taxes on personal injury settlements and verdicts, meaning most compensation for personal injuries is not taxable in the state. However, there are exceptions. For example, punitive damages or damages that are not related to a physical injury are taxable.
Our knowledgeable Minnesota personal injury lawyers can provide guidance on whether any portion of your settlement is taxable and work to minimize your tax liability. Call (651) 437-3148 or contact us online to schedule your free case review.
Will I Have to Pay Taxes on My Personal Injury Settlement?
A personal injury settlement or judgment award is meant to provide compensation for your injuries and losses. The IRS recognizes that proceeds from a lawsuit do not necessarily amount to taxable income, even if paid as a large one-time lump sum.
Your settlement agreement or verdict should itemize your damages. Some of the items may be taxable, and some may not. Our legal team at Sieben Polk is dedicated to maximizing your case results and minimizing your tax liability so more of your compensation stays in your pocket.
Injuries or Illness
Under Title 26 § 104 of the U.S. Code, damages compensating for physical injuries and illnesses are not taxable income. This includes compensation for medical expenses, lost wages, and other financial costs related to your injury or illness. Generally speaking, damages awarded in a wrongful death claim that are attributable to the decedent’s fatal injuries or illness are subject to the same rules.
However, the IRS makes an exception. If you deducted medical expenses in a previous tax year and your settlement includes compensation for those same expenses, the compensation is taxable. This exception only applies if you received a tax benefit from making the deductions.
Pain and Suffering
If your settlement includes pain and suffering damages that stem from a physical injury or illness, they are not taxable. The IRS views this portion of your compensation the same as any other compensation for a physical injury or illness. This applies to non-economic damages like:
- Emotional distress
- Physical pain
- Loss of bodily functions
- Loss of enjoyment of life
- Scarring and disfigurement
However, if your settlement includes an award for emotional distress that does not stem from a physical injury or illness, that portion of your settlement is taxable. Since personal injury claims involve physical injuries by definition, this is rarely an issue.
Property Loss
In addition to compensation for your injuries, you can also recover the value of damaged property, such as your vehicle, without being taxed. However, if your recovery exceeds the value (“adjusted basis”) of the damaged property, the excess is taxable.
Punitive Damages
Unlike compensatory damages awarded to “make you whole,” punitive damages are awarded separately to punish defendants for egregious misbehavior and deter others from similar conduct. Accordingly, punitive damages are always taxable.
Interest Payments
Under IRS rules, all interest accrued because of a delay in payment of your settlement or judgment is taxable income.
Contact Our Personal Injury Lawyers To Protect Your Legal Rights
We have been helping injured accident victims in Minnesota recover compensation for over 50 years. Our knowledgeable attorneys will weigh the tax implications of your case results during settlement negotiations and court proceedings, providing sound legal advice and working to minimize your tax liability.
We are committed to providing individually tailored legal services to every client. When you choose Sieben Polk, you get the best of both worlds: the resources of a large national law firm and the personalized service of a small local firm. Our services start with a free consultation, and you pay nothing unless we obtain compensation through your claim. Call (651) 437-3148 or contact us online to schedule your free consultation.
