Is Settlement Money Received for Lost Wages Taxable?

by Barb

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.

Visitor Question:
Disclaimer: Information provided in our response is NOT formal legal advice. It is generic legal information based on the very limited information provided. Under no circumstances should the information in our response, or anywhere else on this site be relied upon when deciding the proper course of a legal matter. Our response does NOT create an attorney-client relationship. Always get a formal case review from a licensed attorney in your area.

ANSWER for "Is Settlement Money Received for Lost Wages Taxable?":

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 an attorney licensed in your state. Find a local attorney to give you a free case review here, or call (888) 647-2490.

Best of luck,

Judge Calisi

P.S. Please help us out by sharing this site...

Click here to post comments

Return to Lost Income Questions.

How Much Is Your Claim Worth?

Find out now with a FREE case review from an attorney...

How Much Are Your
Injuries Worth?

Find out with a
free attorney review: