If you’ve received a personal injury settlement or jury verdict in Illinois, you may wonder whether you’ll owe taxes on the money. In most cases, compensation for physical injuries is not taxable under federal and Illinois state law.
However, this can vary depending on how your compensation is structured and what types of damages it includes. As tax law is especially complex and is always evolving, it’s best to consult with an experienced tax attorney and certified public accountant (CPA) for guidance, as well as a Chicago personal injury lawyer for support.
When Personal Injury Settlements Are Not Taxable
Generally, the Internal Revenue Service (IRS) excludes from taxable income any damages you receive because of a physical injury or physical sickness. This includes money awarded through a settlement or, alternatively, a court verdict won at trial.
In practical terms, this means that compensation for the following is usually tax-free:
- Medical expenses related to your injuries
- Lost wages attributable to the time you were unable to work due to the injury
- Pain and suffering directly linked to a physical injury or illness
- Property damage resulting from the incident
For example, if you were hurt in a car accident in Illinois and received $100,000 to cover your hospital bills and physical pain, that amount typically would not be subject to state or federal income tax. A Chicago car accident attorney is here to guide you through your claim.
When a Portion of Your Settlement May Be Taxable
Not every part of a personal injury settlement is automatically tax-exempt. Certain types of compensation may be considered taxable income depending on their purpose.
Emotional distress not tied to a physical injury
If you receive damages solely for emotional distress, without a corresponding physical injury, those payments may be taxed. However, if the emotional distress results from your physical injuries, it usually remains non-taxable.
Interest on your settlement
If your case takes time to resolve and your award includes interest, that interest is generally taxable as ordinary income.
Punitive damages
Unlike compensatory damages, which aim to make you whole, punitive damages are meant to punish the defendant for especially wrongful conduct. These are considered taxable under both Illinois and federal tax law.
Deducted medical expenses
If you previously deducted certain medical costs related to your injury on a past tax return, you may need to include that portion of your settlement as taxable income to avoid double-dipping.
How To Protect Yourself When Filing Taxes
Before signing a settlement agreement, it’s wise to have your attorney and a tax professional review the terms. They can help ensure your compensation is categorized correctly and structured in the most tax-efficient way possible.
Maintaining detailed records can also make the process easier at tax time. The IRS and Illinois Department of Revenue may require documentation if they question your return.
Contact a Qualified Attorney for Help Determining Your Taxable Income
While most Illinois personal injury settlements are not taxable, exceptions exist that could leave you owing money if you’re not careful. The best way to protect yourself is to seek personalized advice from a tax attorney or CPA familiar with both Illinois and federal tax law.
At Meyers & Flowers, we may be able to look into your situation and, if we can’t, can refer you to an experienced attorney who can. Give us a call today at (630) 232-6333 or message us online to get started.