We are often asked by our clients if the proceeds or damages from a personal injury case settlement are taxable. The general answer is that personal injury settlement proceeds are not taxable on their receipt by the taxpayer/client. There are some important exceptions.
It is fair to say that a general settlement (where the proceeds are not specifically categorized) is not taxed on the settlement proceeds. In other words, if a client receives a settlement of $50,000 there is no tax on receiving the $50,000 of personal injury proceeds. Of course, once the personal injury settlement money is placed in a bank and interest is earned on the money, the interest is taxable just like any other account.
There has been a new decision out of the District of Columbia federal circuit court of appeals which ruled that emotional distress damages and damages to give compensation for damage to professional reputation are also not taxable damages under the Internal Revenue Code. In a case called Murphy v. IRS., decided August 22, 2006, by the United States Court of Appeals, the court ruled as follows:
It is clear from the record that the damages were awarded to make the plaintiff emotionally and reputationally whole and not to compensate her for lost wages or taxable earnings of any kind…. Every indication is that damages received solely in compensation for a personal injury are not income within the meaning of the Sixteenth Amendment.
Supposedly, the IRS is planning to appeal this federal decision to the U.S. Supreme Court.
Rick Shapiro has practiced personal injury law for over 30 years in Virginia, North Carolina, and throughout the Southeastern United States. He is a Board-Certified Civil Trial Advocate by the National Board of Trial Advocacy (ABA Accredited) and has litigated injury cases throughout the eastern United States, including wrongful death, trucking, faulty products, railroad, and medical negligence claims. During his three-decade career, Shapiro has won client appeals before the VA Supreme Court, VA Court of Appeals, NC Supreme Court, SC Supreme Court, WV Supreme Court, TN Supreme Court, and three times before the United States Court of Appeals for the Fourth Circuit, underscoring Shapiro’s trial achievements. In addition, he and his law firm have won settlements/verdicts in excess of $100 million. His success in and out of the courtroom is a big reason why he was named 2019 “Lawyer of the Year” in railroad law in U.S. News & World Report's Best Lawyers publication (Norfolk, VA area), and he has been named a “Best Lawyer” and “Super Lawyer” by those peer-reviewed organizations for multiple years. Rick was also named a “Leader in the Law, Class of 2022” by Virginia Lawyers Weekly (total of 33 statewide honorees consisting of lawyers and judges across Virginia). And in September 2023, Rick was selected as a recipient of the National Board of Trial Advocacy (NBTA) 2023 President’s Award. Although many nominations were submitted from across the country, Rick was just one of eight attorneys chosen by the prestigious National Board which certifies civil trial attorneys across the U.S. Rick was also recently named to Virginia Lawyers Weekly 2024 Virginia’s Go To Lawyers Medical Malpractice. The attorneys awarded this honor are nominated by their colleagues and chosen by a panel from the publication.
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