Usually not, when the money compensates a physical injury or physical sickness. Federal law at 26 U.S.C. 104(a)(2) excludes those damages from income, whether you settle or win at trial, from a fall, a dog bite, a crash or a medical error. Interest, punitive damages, earlier deducted medical costs and claims with no physical injury can be taxed, so have a tax professional review the agreement.
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Do you pay taxes on a personal injury settlement?
The tax code counts every kind of income unless a specific rule removes it (26 U.S.C. 61). For injured people, that rule is section 104. It covers damages “on account of personal physical injuries or physical sickness,” and the type of accident does not matter. A slip on a wet grocery store floor, a bite from a neighbor’s dog, a surgical mistake and a truck crash are all treated alike if the money pays for a bodily injury.
The IRS tells taxpayers to look at what the settlement replaces. Publication 525 says to leave out of income compensatory damages for personal physical injury or physical sickness, whether paid in one lump sum or in installments. The same rule applies to the part of the money meant for your pain, your medical bills and your lost earnings, as long as all of it flows from the bodily harm.
Is a personal injury settlement taxable in California?
California generally follows the federal treatment. The Franchise Tax Board wrote in a 2024 bill analysis that California conforms to IRC section 104 as of January 1, 2015 (FTB analysis of AB 2979). So a payment for a physical injury that is excluded on your federal return is generally excluded on your California return as well. Taxable parts, such as interest, are reported to both.
What about Texas and Washington?
- Texas. The Texas Comptroller states that Texas has no state income tax. The federal rules on this page still apply to a Texas resident.
- Washington. The Department of Revenue says Washington does not currently have an individual income tax, and that a new 9.9% income tax for individuals and married couples filing jointly with adjusted gross income over $1 million starts January 1, 2028. Washington also has a separate capital gains excise tax on the sale of long-term capital assets such as stocks and bonds. An injury settlement is not the sale of an asset, but ask a tax professional if you invest the money and later sell.
When is emotional distress money taxable?
This is where many personal injury claims part ways with car crash claims. The Treasury regulation, 26 CFR 1.104-1(c), says emotional distress is not a physical injury by itself. Publication 525 explains the result:
- Distress caused by a physical injury. Anxiety, sleeplessness or depression after a broken leg are treated as part of the physical injury claim and are generally left out of income.
- Distress with no physical injury. Damages for something like injury to reputation or unlawful discrimination are generally included in income, except the part that pays for medical care for the distress.
Publication 525 adds that emotional distress includes physical symptoms that come from it, such as headaches, insomnia and stomach problems.
The IRS page on settlements and judgments notes one more point: damages for a non-physical injury, such as emotional distress or defamation, are generally included in income but are not subject to federal employment taxes.
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Which parts of an injury settlement does the IRS tax?
| Part of the settlement | General federal rule |
|---|---|
| Compensation for a physical injury | Excluded from income |
| Distress caused by that injury | Excluded from income |
| Interest on the award | Taxable interest |
| Punitive damages | Taxable, even in a physical injury case |
| Repayment of medical costs you deducted before | Taxable to the extent the deduction helped you |
| Distress with no physical injury | Taxable, minus medical care for the distress |
A few notes on that table:
- Punitive damages. Section 104(c) has a narrow exception for wrongful death cases in states whose law allows only punitive damages in that kind of case.
- Earlier deductions. If you itemized and deducted injury-related medical bills, the IRS rule in Topic 502 limits that deduction to costs above 7.5% of adjusted gross income that insurance or someone else did not pay. If a settlement later repays those costs, Publication 4345 says that part is taxable only to the extent the deduction gave you a tax benefit, spread across the years involved.
- Interest. IRS Topic 403 says interest is reported even if no Form 1099-INT arrives.
Example only. A person injured by a falling store display settles for $80,000 for injuries, plus $5,000 of punitive damages in a separate judgment and $900 of interest. Under the general rules, the $5,000 and the $900 would be taxable and the $80,000 generally would not. Your agreement and tax history decide the real answer.
Do I owe tax on the attorney’s share?
In Commissioner v. Banks (2005), the Supreme Court held that, as a general rule, when a recovery is income, the part paid to the lawyer as a contingent fee is also the client’s income. Publication 525 lists attorney fees and costs as ordinary income where the underlying recovery is included in gross income. When the recovery is for a physical injury and excluded, this question generally does not arise. The IRS instructions for Form 1099-MISC require payers to report at least $600 in gross proceeds paid to an attorney, so a Form 1099 may be filed for your lawyer even when nothing is taxable to you.
For a car-crash version of these rules, see are car accident settlements taxable.
What to do now
- Ask that the settlement agreement say clearly that the payment is for personal physical injuries or physical sickness, if that is what the claim was about. Publication 4345 says the IRS generally accepts an allocation that matches the substance of the claims.
- Ask for interest and any punitive amount to be listed on separate lines.
- Pull your returns for the years since the injury and look for itemized medical deductions.
- If part of the money is taxable and you expect to owe $1,000 or more, read the IRS page on estimated taxes.
- Keep the agreement, the closing statement and any Form 1099 together.
- Bring all of it to a CPA or enrolled agent before you file. See also how settlements are paid out and the settlement check.
Get your settlement wording checked
This page gives general tax information, not tax advice for your case. If you were hurt in California, Texas or Washington and want help with your claim or with how the settlement is written, call Beverly Law at (310) 552-6959. Texas cases are handled by the firm’s Texas-licensed attorneys, Joyce Ondich and John Efstathiou. You owe no fees or costs unless we win.
Common questions
Is a medical malpractice settlement taxable?
Generally no, if it pays for physical injury or sickness caused by the care. Interest and punitive damages follow the usual taxable rules.
Is a wrongful death settlement taxable for the family?
Compensatory damages for a death caused by physical injury are generally excluded under section 104(a)(2). Punitive damages are generally taxable, with the narrow section 104(c) exception.
Are workers’ compensation benefits taxable?
Section 104(a)(1) and 26 CFR 1.104-1(b) exclude benefits paid under a workers’ compensation act for work injuries. Retirement pensions based on age or years of service are not covered by that exclusion.
Is a settlement for a non-physical injury taxable?
Usually yes, apart from amounts for medical care of the distress.
Do I report a tax-free injury settlement on my return?
Publication 4345 says that if you did not deduct the related medical costs, the full amount for physical injury is nontaxable and is not included in income. Taxable parts are reported.
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Related pages
Car Accident Settlements · Car accident settlements · Are car accident settlements taxable? · How personal injury settlements are paid out · Your settlement check · Law Blog
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Sources
- 26 U.S. Code section 104, compensation for injuries or sickness (Cornell LII)
- 26 CFR 1.104-1, compensation for injuries or sickness (Cornell LII)
- 26 U.S. Code section 61, gross income defined (Cornell LII)
- 26 U.S. Code section 213, medical expenses (Cornell LII)
- IRS Publication 4345, Settlements: Taxability
- IRS Publication 525, Taxable and Nontaxable Income
- IRS: Tax implications of settlements and judgments
- IRS Topic 403, Interest received
- IRS Topic 502, Medical and dental expenses
- IRS: Instructions for Forms 1099-MISC and 1099-NEC
- IRS: Estimated taxes
- U.S. Supreme Court, Commissioner v. Banks, 543 U.S. 426 (2005) (Cornell LII)
- California Franchise Tax Board: bill analysis of AB 2979 (2024)
- Texas Comptroller: Texas is open for small business
- Washington Department of Revenue: income tax
- Washington Department of Revenue: capital gains tax
Important: This page is general information, not legal advice, and reading it does not create an attorney-client relationship with Beverly Law. Laws change and every case is different; talk to a lawyer about your own situation. Attorney advertising. Prior results do not guarantee a similar outcome. You owe no fees or costs unless we win. Texas cases are handled by the firm’s Texas-licensed attorneys, Joyce Ondich and John Efstathiou. Last reviewed: 2026-11-12.