Are Personal Injury Settlements Taxable in WA?

Suffering a serious injury is overwhelming enough, with the pain, the doctor visits, and the time away from work. The financial pressure can be incredibly stressful on top of that. When a settlement finally comes through, it often feels like the first real relief in a long time. But then another worry creeps in: Will I have to pay taxes on this money? It’s a fair and important question, especially when every dollar counts after a serious injury.

Working with our exceptional personal injury lawyers can help ensure you receive a fair settlement that reflects the full extent of your losses. Here's what you need to know to plan with confidence.

General Rule: Personal Injury Settlements Are Not Taxable

Under federal law, the Internal Revenue Service (IRS) generally doesn’t tax compensatory damages for physical injuries or physical sickness. That means if you’ve suffered a personal bodily injury, like a broken bone from a car accident, and you receive compensation for your medical expenses, pain and suffering, or other directly related damages, that part of your personal injury settlement is typically non-taxable.

This general rule applies to settlement proceeds that cover:

• Medical bills and medical expenses related to the physical injury
• Pain and suffering resulting directly from a physical injury
• Compensation for permanent physical disabilities or disfigurement
• Emotional distress that stems from physical harm

In other words, compensatory damages awarded for personal physical injuries are typically tax-exempt.

Tax-Free Personal Injury Settlements in WA

Several types of personal injury cases generally result in non-taxable settlements:

• Traffic accidents
• Boating accidents
• Dog bites
• Premises liability cases, including slip and fall
• Workplace accidents
• Medical negligence
• Harmful medications
• Defective product injuries
• Wrongful death claims
• Property damage, like damage to your car in an accident (if you recover more than the value of the property, the excess is considered income)

However, figuring out the tax status of your settlement can be complex. Personal injury settlements often include various types of compensation, and some portions may be taxable while others aren't. For example, if this is a wrongful death settlement, portions related to punitive damages, interest earned, or lost income for the deceased may be subject to tax. It is best to ask a personal injury lawyer for advice regarding your specific case.

Taxable Personal Injury Damages

Certain parts of a personal injury lawsuit settlement can be taxable, even if the core of the claim stems from a physical injury. These include:

1. Lost Wages and Lost Income

If part of your settlement compensates for lost wages or lost income, the IRS considers that portion taxable, just as your regular paycheck would be. These payments are treated as substitute income and must be included in your gross income.

2. Emotional Distress or Mental Anguish (Without Physical Injury)

If you receive money for emotional distress damages that are not linked to a physical injury, those damages are generally taxable. For example, in a personal injury case involving workplace harassment or defamation, where there is no physical harm, any compensation for emotional harm would be included in your income.

However, if the emotional distress is directly related to a physical injury (e.g., PTSD following a car accident), the compensation may still be non-taxable.

3. Previously Deducted Medical Expenses

If you itemized deductions in prior tax years and previously deducted medical expenses related to your injury, any compensation you later receive to cover those expenses is taxable. This avoids what's known as a “double benefit” — where a person deducts expenses and receives tax-free reimbursement.

4. Interest Earned on the Settlement

In some cases, a settlement may include interest, especially if there was a delay in payment or if the funds were held in escrow. Any interest earned is taxable, even if the settlement itself is not.

Maximize Your Recovery, Minimize Tax Surprises

Not all injury settlements are created equal. While many parts of a personal injury settlement are tax-exempt, other components may create an unexpected tax burden. The tax consequences can get tricky if your settlement involves multiple categories, like lost income, punitive damages, or emotional distress. In those cases, it’s a good idea to consult with a tax attorney who can guide you based on current IRS regulations and your specific situation.

Our experienced Seattle personal injury lawyers at Lehmbecker Law fight for full and fair compensation for injury victims, and we understand how to structure your settlement to reduce tax exposure, if any. Contact us today for a free consultation and let us help you keep what you’re owed, with clarity on any tax implications.