Accessible, Personalized Representation Schedule a Free Consultation

Will I Be Taxed on My Personal Injury Settlement?

Slechter Law Firm, PLLC
Personal injury settlement money

In Kentucky, personal injury and accident victims are often entitled to receive compensation for injuries, damages, and losses suffered. As a civic responsibility, you're expected to pay taxes on your income, any additional income earned, lottery won, or inheritance received. Financial compensation received from a personal injury claim is generally not taxable. However, there are specific circumstances and exceptions that may require you to pay taxes on a portion of your personal injury settlement. 

Mr. Slechter and Mrs. Slechter have the diligence and skill to advise and guide clients in complex personal injury matters involving taxation. Slechter Law Firm, PLLC’s trusted personal injury attorneys can evaluate your unique situation and help you understand the taxation laws in Kentucky for personal injury claims. The firm proudly serves clients across Louisville and Lexington, Kentucky. 

IRS and State Taxes after Receiving Compensation   

A personal injury settlement can be described as a financial compensation or amount received for injuries, damages, or losses suffered as a result of another person's negligence or recklessness. In the Commonwealth of Kentucky, available damages in a personal injury claim or lawsuit are classified into economic and noneconomic damages. 

Economic Damages: Economic damages are actual damages that result from physical or non-physical injuries suffered by the accident victim or claimant. Examples include: 

  • medical expenses 

  • lost income/wages and benefits 

  • loss of earning capacity 

  • property damages 

  • future medical treatment 

  • out-of-pocket expenses due to the accident or injury 

  • & more 

Non-Economic Damages: Non-economic damages are damages for subjective or non-monetary losses that the victim suffers. Examples include: 

  • emotional distress 

  • physical pain and discomfort 

  • mental anguish and trauma 

  • scarring and disfigurement 

  • loss of enjoyment of life 

  • decrease in quality of life 

  • & more  

Punitive Damages: Punitive damages are usually awarded to further penalize, punish, or discourage the defendant or others from similar conduct in the future.  

Federal Taxes and Personal Injury Settlements 

As mentioned earlier, any income that an individual earns will be subject to taxes under federal tax laws. However, the Internal Revenue Service (IRS) doesn't consider economic and non-economic damages as taxable income or gain. Therefore, such personal injury settlements will not be subject to federal taxes. 

Pursuant to IRS Revised Code Section 85-97: "The entire amount received by an individual in settlement of a suit for personal injuries sustained in an accident, including the portion of the amount allocable to the claim for lost wages, is excludable from the individual's gross income." 

Kentucky State Taxes and Personal Injury Settlements 

Additionally, financial compensation received in settlement of your medical expenses, property damages, and pain and suffering due to the accident or injury are not taxable in Kentucky. These damages are only meant to reimburse you for your injuries and damages suffered from the incident. Hence, Kentucky tax laws don't consider them as taxable income or financial gain. However, there are certain exceptions to the rule. 

Exceptions to the Non-Taxation Rule in Kentucky 

Furthermore, there are several exceptions to the non-taxation rule in the Commonwealth of Kentucky.  

Economic Damages: In Kentucky, economic damages, such as lost wages, are taxable. The lost wages received are similar to your actual wages if you weren't injured. Hence, you're expected to pay taxes on them. 

Non-Economic Damages: Also, non-economic damages for emotional distress and mental anguish are taxable. They're not considered a "physical" injury. Therefore, you must pay taxes on them. 

Punitive Damages: In Kentucky, punitive damages are often awarded against a defendant to further punish them for acting towards the victim or plaintiff with fraud, oppression, or malice. Technically, punitive damages are not considered as part of the personal injury settlement. The purpose of punitive damage is to punish the defendant rather than compensate the claimant. Hence, they are taxable. 

Are Interests on a Judgment Taxable? 

Yes. If you receive a personal injury judgment and the damages awarded to you include interests, the interest on the judgment is taxable. In most cases, judges usually include an interest provision on the damages award until the insurance provider or defendant is able to pay the settlement fully. Therefore, you're expected to pay taxes on any interest amount on your monetary award. 

Get in Touch With an Attorney  

Understanding the taxation laws in Kentucky for personal injury claims is crucial to remain tax-compliant and avoid potential fines and penalties. Over the years, the trusted attorneys at Slechter Law Firm, PLLC, have successfully recovered millions of dollars in settlements and verdicts for accident victims. 

Using their extensive knowledge, Mr. Slechter and Mrs. Slechter can help identify personal injury damages that are taxable or not taxable. In addition, we will handle all discussions and negotiations with the insurance provider on your behalf and help you recover the maximum possible financial compensation for your injuries, damages, or losses. 

Contact Slechter Law Firm, PLLC, today to schedule a simple consultation with experienced personal injury lawyers. Mr. Slechter and Mrs. Slechter can offer you the personalized legal guidance and compassionate representation you need in your personal injury claims. The firm proudly serves clients across Louisville, Kentucky, and surrounding areas throughout the state, including Lexington.