Will I owe taxes on my Settlement money?

THE REAL ANSWER IS THAT IT DEPENDS.

The taxability of settlement money depends on what the money compensates you for.

In most cases, money you receive for a physical injury is not subject to federal tax. However, not every part of a personal injury settlement is necessarily tax-free. Certain parts of a settlement may be taxable, including punitive damages, some forms of interest, and certain payments for emotional distress that are not related to a physical injury. If you previously deducted medical expenses on your tax return and received a tax benefit from those deductions, reimbursement for those expenses may also have tax consequences.

To help determine whether taxes may be owed, keep a copy of your settlement agreement, closing statement, and any related tax documents. Your Attorney or tax professional can discuss the specific types of payments you received and explain how they may affect your taxes. Do not rely on just the label of your settlement to understand tax information.

Every case is different, so it is important to get advice based on the details of your settlement.