Is a Personal Injury Settlement Taxable?

The IRS’s 2026 tax season officially begins on Monday, January 26, 2026, when the agency starts accepting and processing 2025 federal tax returns. It runs through April 15, 2026—better known as “Tax Day.”

Major life changes—such as marriage, divorce, having children, buying a home, or receiving a personal injury settlement—can all affect your taxes.

If you recently received, or plan on receiving, a personal injury settlement, you may be wondering: Is a personal injury settlement taxable?

A personal injury settlement is often a one-time event and is generally tax-free. But some portions of a settlement may be taxable, and the tax impact can extend across multiple years.

In some cases, settlements can also be structured to help minimize tax liability.

The best time to address tax issues is before payment is issued, which means planning ahead with an attorney if you expect a personal injury settlement. But even after a settlement is finalized, there are important reporting steps to follow. Don’t assume that “tax-free” means “no reporting.”

What’s Taxable (and What Isn’t) From a Personal Injury Settlement

Although hardly a “holiday,” you might “celebrate” Tax Day if you are expecting a refund this year.

The average federal tax refund is around $2,000 – $3,000, but the White House says refunds could be $1,000 higher or more on average this season due to changes in President Trump’s tax bill.

“Average,” however, doesn’t reflect unusual tax situations, like receiving a personal injury settlement.

If you’ve been through months (or years) of medical treatment, documentation, negotiations, and litigation, a settlement feels earned. When payment finally arrives, it can bring much-needed financial relief, especially if injuries made it difficult to work or meet everyday expenses. From a tax perspective, however, settlement proceeds are not treated the same way as wages, salary, and other earnings.

As a general rule, compensation for personal physical injuries or physical sickness is not considered taxable income. That’s why many settlements are fully or largely tax-free. But not every dollar paid in connection with an injury is automatically excluded. Some portions may be taxable.

Understanding these distinctions can help prevent unpleasant surprises during tax season.

What’s (Generally) Not Taxable in a Personal Injury Settlement

In most cases, the following portions of a personal injury settlement are excluded from federal income tax:

• Compensation for personal physical injuries or physical sickness: This includes damages that compensate you for the injury itself.
• Pain and suffering related to a physical injury: When pain and suffering stem directly from a physical injury, they are typically treated as non-taxable.
• Medical expenses related to the injury: As long as those expenses were not previously deducted on a tax return.
• Lost wages resulting from a physical injury: While wages are normally taxable, lost income tied to physical injury usually is not.

What (May) Be Taxable In Injury Cases

Some personal injury settlement components do not receive the same favorable tax treatment:

• Punitive damages: These are almost always taxable, regardless of whether the case involves a physical injury.
• Mental and emotional distress arising from non-physical injuries: Mental and emotional distress are only excluded from gross income when occurring from a physical injury or physical sickness.
• Interest on a settlement or judgment: Pre- or post-judgment interest may be taxable.
• Reimbursement of previously deducted medical expenses: If you claimed a medical deduction in a prior year and later recovered those costs through a settlement, that portion may be taxable under the tax-benefit rule.
• Confidentiality clauses: If the settlement includes non-personal injury related compensation for confidentiality, this creates a taxable event.

The Bottom Line on PI Settlements and Taxes

The IRS focuses on what the settlement is actually paying for, not just the fact that it arose from a personal injury claim.

• The same tax rules apply whether compensation comes from a negotiated settlement or a jury verdict; what matters to the IRS is the reason for the payment.
• Two people can receive similar settlement amounts and face very different tax outcomes depending on how the damages are characterized.
• That’s also why settlement language, timing, and planning can matter long before payment is issued—and why surprises often surface months later, when tax returns are filed.

Since Ohio usually starts with federal adjusted gross income, the federal tax treatment of a personal injury settlement in most cases determines whether any portion is taxable at the state level as well.

Personal Injury Settlement Tax Documentation and Practical Steps

IRS rules on what is taxable from a personal injury settlement draw a fairly clean line between compensation for physical injuries and amounts paid for other purposes. Problems usually arise when documentation is vague, incomplete, or handled as an afterthought.

Settlement Language and Damage Allocation

The IRS looks at the nature of the damages, not just the label “personal injury settlement.”

When a settlement agreement clearly identifies what compensation is being paid for—such as physical injury, medical expenses, or punitive damages—it reduces ambiguity later.

Broad or lump-sum settlement language that doesn’t clearly allocate damages, on the other hand, can create confusion during tax reporting and increase the risk of unfavorable interpretations.

Medical Expense Records

Medical costs are a core component of most settlements, but they can create tax issues if prior deductions were taken.

If medical expenses related to the injury were deducted on earlier tax returns, later reimbursement through a settlement may be taxable under the tax-benefit rule.

Keeping clear records of which expenses were deducted—and which were not—helps ensure settlement proceeds are reported accurately.

IRS Reporting and Form Surprises

Very few personal injury settlement payments trigger IRS reporting forms, such as Form 1099, when all or part of the settlement is ultimately non-taxable.

Receiving a 1099 does not automatically mean the entire settlement is taxable. It does, however, mean the IRS is expecting to see the payment addressed on a tax return. Ignoring the form or assuming it was issued mistakenly can lead to avoidable problems.

Timing and Recordkeeping

Settlement timing can affect more than one tax year if payments are delayed, structured, or accrue interest. Keeping settlement documents, payment records, and correspondence together makes it easier to track how and when funds were received—and how they should be treated for tax purposes.

Avoid Pain at Tax Time

If you fail to raise tax considerations with your attorney before a settlement is finalized, you may be in for a rude awakening come tax time. Working with an experienced personal injury attorney at Graham Law can help reduce any tax implications on your personal injury settlement. Contact us.