Will They Tax Your Injury Money?

Apr 13, 2024 | Allen A. Ritchie | 0 comments


Allen's Answers - Government & Your Personal Injury Settlement

The number one question I receive this time of year is: will the government take a share of my personal injury settlement?

This is an important question because the money is meant to help you get back to where you were before the accident, and if the government takes a share, there may not be enough left.

Knowing that I am not a tax lawyer but rather a personal injury lawyer, here is how I explain it to my clients. The bottom line is …. No. Generally, neither the federal government nor the state of Alabama will take a share of your personal injury settlement.

Here is what makes your settlement different from a lottery win (which the government does want a share). An injury settlement is meant to replace what you lost. So, generally speaking, you already paid taxes on that money.

Now, there is one big exception. Punitive damages are taxable. Punitive damages are awarded to you to hopefully stop the wrongdoer from repeating his or her bad behavior. However, even in this type of case, only the punitive damages are taxed; the rest of the injury settlement is not taxed.

Now, Alabama has an odd situation where if the victim dies, the only money collectible is punitive. So, if money is awarded in such a case, the surviving family members will see a tax bill.

There is one other oddity concerning taxes and a personal injury settlement. For the settlement not to be taxed, there must be a physical injury. If the injury is, for example, only emotional and psychological distress, taxes will probably have to be paid. This is very rare.

Now, with large dollar case settlements, we offer to set up our clients with a financial adviser. They don’t have to, but they should. In fact, we have helped arrange to hold out a portion for taxes if needed.

For your specific situation, please don’t rely on a personal injury lawyer, including myself, when it comes to tax law. Get a good tax law attorney. If you need some recommendations, I will be glad to give them to you.

If you are injured in a traffic accident or suffer any other personal injury, such as an on-the-job injury, nursing home neglect incident, slip-and-fall, or boating accident, you can talk to us at the law firm of Steele Ritchie for free. We genuinely want to help. We are local attorneys with decades of experience helping people, especially in the southwest Mobile area. Give us a call at (251) 666-1212.

Allen Ritchie

Alabama Personal Injury Lawyer