Visitor Question

Is Settlement Money Received for Lost Wages Taxable?

Submitted By: Barb (PA)

I am asking this question for someone else – He was in a vehicle that was hit by another vehicle – he had injuries and was out of work for 3 months – He will be getting a settlement for lost wages and also out of pocket medical expenses –

Is the money received for lost wages taxable?

Thanks for your help.

Disclaimer: Our response is not formal legal advice and does not create an attorney-client relationship. It is generic legal information based on the very limited information provided. Do not rely upon the information in our response, or anywhere else on this site, when deciding the proper course of a legal matter. Always get a personalized case review from a local attorney.

Answer

Dear Barb,

Your question is excellent and comes up frequently. In terms of whether to tax an individual on monies received in the course of a “settlement”, the IRS looks at what the settlement compensates the injured party for;

If it compensates a party for their physical pain and suffering related to the accident, then it is most certainly non-taxable. If, on the other hand, it replaces income (which, remember would have been taxed if received), then the view point from a tax perspective, is that this money will be taxed.

The short answer to your question is yes. Compensation for pain and suffering is NOT taxable however compensation for lost wages IS taxable because it would have been taxable in the first place.

In sum, it all depends on the wording of a settlement agreement and the description of what exactly you are being compensated for. As a general rule of thumb, if it would have been taxed in the first place, it is taxable in a personal injury settlement.

The above is general information. Laws change frequently, and across jurisdictions. You should get a personalized case evaluation from a licensed attorney. Find a local attorney to give you a free case review here , or call (888) 647-2490.

Best of luck,

Published: April 12, 2010

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