Monies obtained as compensation in settlement (or verdict) of a personal injury claim are not taxable as income under the federal code. Each state's tax laws may be different, although many States follow the federal guideline on this point (New York, for example, also does not tax these monies).
Certain portions of a personal injury award can be taxable as income. Generally, amounts awarded for the physical injury or sickness are not taxable, but punitive damages or awards for pain and suffering are taxable as income.
When you receive payments received as compensation for physical injury or physical sickness, they are federal-income-tax-free. The same is true for compensation for emotional distress that evolves from the physical injury or sickness. The distress you experience is considered a part of the physical injury or sickness. However, the amount you claim on your taxes as a medical expense deduction that is later reimbursed as part of your settlement, must be reported as income on your return. DO consult with your tax professional about how this will affectyour specific situation.
on your tax return.
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The comments that all of my colleagues posted also apply here in Arizona. Money that you received as compensation for pain and suffering, you do not have to pay taxes on. Money that you received for lost wages and/or punitive damages, you would have to pay taxes on.
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