[{"@context":"https:\/\/schema.org\/","@type":"BlogPosting","@id":"https:\/\/www.attorneync.com\/blog\/personal-injury-settlements-taxable-north-carolina\/#BlogPosting","mainEntityOfPage":"https:\/\/www.attorneync.com\/blog\/personal-injury-settlements-taxable-north-carolina\/","headline":"Understanding Personal Injury Settlements and Taxes","name":"Understanding Personal Injury Settlements and Taxes","description":"Personal injury clients sometimes ask whether they will have to pay taxes on any compensation recovered in a personal injury claim. The answer is that in most cases, Uncle Sam will not tax the majority of a personal injury settlement. Personal injury claims are meant to make people who have...","datePublished":"2023-05-16","dateModified":"2025-08-18","author":{"@type":"Person","@id":"https:\/\/www.attorneync.com\/blog\/author\/david-e-vtipil\/#Person","name":"David E. Vtipil","url":"https:\/\/www.attorneync.com\/blog\/author\/david-e-vtipil\/","identifier":43,"image":{"@type":"ImageObject","@id":"https:\/\/www.attorneync.com\/wp-content\/uploads\/2019\/05\/David-E-Vtipil-bio-96x96.png","url":"https:\/\/www.attorneync.com\/wp-content\/uploads\/2019\/05\/David-E-Vtipil-bio-96x96.png","height":96,"width":96}},"publisher":{"@type":"Organization","name":"Younce, Vtipil, Baznik & Banks P.A.","logo":{"@type":"ImageObject","@id":"https:\/\/www.attorneync.com\/wp-content\/uploads\/2020\/03\/logo2020b.png","url":"https:\/\/www.attorneync.com\/wp-content\/uploads\/2020\/03\/logo2020b.png","width":390,"height":107}},"image":{"@type":"ImageObject","@id":"https:\/\/www.attorneync.com\/wp-content\/uploads\/2023\/05\/personal-injury-settlements-and-taxes.png","url":"https:\/\/www.attorneync.com\/wp-content\/uploads\/2023\/05\/personal-injury-settlements-and-taxes.png","height":366,"width":500},"url":"https:\/\/www.attorneync.com\/blog\/personal-injury-settlements-taxable-north-carolina\/","about":["Personal Injury"],"wordCount":1011,"articleBody":"Personal injury clients sometimes ask whether they will have to pay taxes on any compensation recovered in a personal injury claim. The answer is that in most cases, Uncle Sam will not tax the majority of a personal injury settlement.Personal injury claims are meant to make people who have been injured because of others\u2019 carelessness or recklessness financially whole. At\u00a0Younce, Vtipil, Baznik & Banks, P.A. we help people who have been seriously injured in accidents through no fault of their own seek full compensation for medical expenses, lost income from missed work, pain and suffering,\u00a0 property damage (such as in a car accident), and more.In general, the IRS taxes income. But Internal Revenue Code Section 104 exempts certain income derived from lawsuits, settlements, and awards from taxation depending on the reason it was awarded. Specifically exempted are \u201cany damages (other than punitive damages) received \u2026 on account of personal physical injuries or physical sickness.\u201dAs your attorneys, Younce, Vtipil, Baznik & Banks, P.A. would work to structure any settlement you were to receive to minimize your tax burden where possible. We also would advise anyone receiving a substantial settlement to consult a tax advisor.Types of Compensation Recovered in Personal Injury CasesA personal injury claim may seek three types of compensation for the individual who has been injured:Economic damages, which repay the plaintiff for their monetary losses, such as medical bill payments, lost wages while injured, car repair bills, and diminished earning capacity\u00a0if the injuries impair the plaintiff\u2019s ability to work for a living.Noneconomic damages, which the plaintiff may demand for their physical pain, emotional suffering, loss of enjoyment of life, or loss of consortium.Punitive damages, compensation meant to deter wanton acts of recklessness and warn others that such behavior will not be tolerated. Punitive damages are only sought in extraordinary cases and are seldom awarded.The Internal Revenue Service\u2019s general rule is that all income is taxable from whatever source derived unless exempted by another section of the code.As we\u2019ve seen, the Tax Code does exempt economic and noneconomic damages derived from personal injury lawsuits in most cases. However, punitive damages, if any are awarded, are taxable in North Carolina.Are Economic Damages Awarded in Personal Injury Claims Taxed?In general, economic damages demanded in a personal injury claim, also known as \u201ccompensatory damages,\u201d are meant to reimburse the plaintiff for their actual expenses and financial losses. Damages due for medical bills and property damage are based on bills and receipts. Because there is no monetary gain, economic damages are not treated as income and therefore are not taxed.However, a taxpayer may deduct medical expenses from their taxes for the year they occurred. If this deduction is taken in a year prior to receiving a lawsuit settlement or award, all or part of the compensation the taxpayer eventually recovers for medical bills would be taxable.It might seem like damages paid for lost wages or diminished earning capacity would be taxed as income, but the IRS Code excludes from gross income \u201cthe amount of any damages (other than punitive) received \u2026 on account of personal physical injuries or physical sickness.\u201d Further, IRS guidance on tax implications of settlements and judgments says, \u201cthe Service has consistently held that compensatory damages, including lost wages, received on account of a personal physical injury are\u00a0excludable from gross income.\u201dAre Noneconomic Damages Awarded in Personal Injury Claims Taxed?Noneconomic damages are so named because there\u2019s no specific dollar value for losses due to pain and suffering. They are paid to compensate the plaintiff for unjust physical pain or discomfort, loss of amenities, and mental distress.When these payments are a direct result of physical injury, they, too, are exempt from taxation. In a guide focused on the treatment of lawsuit settlements and awards proceeds, the IRS considers a typical recovery in a personal injury case to illustrate the usual meaning of \u201con account of personal injuries\u201d \u2014Assume that a taxpayer is in an automobile accident, is injured, and, as a result of that injury, suffers (a) medical expenses, (b) lost wages, and (c) pain, suffering, and emotional distress that cannot be measured with precision. If the taxpayer settles a resulting lawsuit for $30,000 (and if the taxpayer has not previously deducted her medical expenses \u2026), the entire $30,000 would be excludable under \u00a7 104(a)(2).The medical expenses for injuries arising out of the accident clearly constitute damages received \u201con account of personal injuries.\u201d Similarly, the portion of the settlement intended to compensate for pain and suffering constitutes damages \u201con account of personal injury.\u201dInterest Payments on Personal Injury Claims are TaxedNorth Carolina law requires insurers to pay interest on claims not paid within the statutory time frames. If the case requires going to court, a final settlement or jury award may include an interest payment on compensation the plaintiff should have had sooner.Any interest paid on a personal injury claim would have to be reported as income and be subject to taxation.Contact Our Personal Injury AttorneysAt Younce, Vtipil, Baznik & Banks, P.A. we understand that after a serious injury, you may be unsure of where to turn for help and what the implications of a personal injury lawsuit may be. Our attorneys and legal staff are here to help you understand your legal options and how the law applies to your injury. If we believe that you have a valid injury claim, we will be ready to help you pursue compensation through an insurance settlement or lawsuit.It costs you nothing to discuss your legal options with an experienced and compassionate personal injury lawyer. An initial legal consultation is free. Contact us today to get started.About the AuthorDavid E. VtipilDavid Vtipil is an attorney at Younce, Vtipil, Baznik & Banks, P.A. and concentrates his law practice on personal injury and workers' compensation. David E. Vtipil was selected by his peers for inclusion in the 21st Edition of The Best Lawyers in America\u00a0in the field of Workers\u2019 Compensation Law."},{"@context":"https:\/\/schema.org\/","@type":"BreadcrumbList","itemListElement":[{"@type":"ListItem","position":1,"name":"Blog","item":"https:\/\/www.attorneync.com\/blog\/#breadcrumbitem"},{"@type":"ListItem","position":2,"name":"Understanding Personal Injury Settlements and Taxes","item":"https:\/\/www.attorneync.com\/blog\/personal-injury-settlements-taxable-north-carolina\/#breadcrumbitem"}]}]