Do I have to pay taxes on my personal injury settlement?

Most personal injury settlements are not taxable as income under federal law. IRC Section 104 excludes from gross income any damages received on account of physical personal injuries or physical sickness — including compensation for medical expenses, lost wages (when part of a physical injury claim), pain and suffering, and emotional distress arising from physical injury. However, certain components of settlements are taxable: punitive damages are fully taxable as ordinary income; interest on delayed settlement payments is taxable; compensation for emotional distress not arising from physical injury is taxable; and any settlement proceeds that reimburse medical expenses you previously deducted on your taxes may be partially taxable. State tax treatment largely mirrors federal law, but some states differ. Before your settlement closes, consult with a CPA experienced in personal injury settlements to confirm the tax treatment of each component and plan appropriately for any taxable portion.