If you’ve received or are expecting a personal injury settlement in Illinois, you may be wondering how it will affect your taxes. After a settlement, nobody wants an unpleasant surprise from the IRS or the Illinois Department of Revenue. Fortunately, many types of personal injury compensation are not taxable. However, some exceptions depend on the type of damages you recover.
The following sections discuss what portions of a Genava, IL personal injury settlement are excludable from taxes and which parts may be subject to taxation.
Compensation for Physical Injuries Is Generally Not Taxable
Under federal tax law, compensation for physical injuries or physical sickness is usually excluded from taxable income. This includes money you receive for:
- Medical bills and treatment expenses
- Lost wages attributable to the time missed due to your injuries
- Pain and suffering tied to a physical injury
- Emotional distress directly resulting from a physical injury
For example, if you broke your leg in a car accident and received a settlement covering your medical care and lost income, you would generally not owe federal or Illinois state income taxes on that amount. This money is meant to make you whole again, not to provide taxable income.
When Settlement Proceeds May Be Taxable
Most parts of a personal injury settlement are tax-free. However, there are important exceptions:
- Punitive damages – These are designed to punish the defendant for especially reckless or intentional conduct. Because they are not tied to your losses, they may be considered taxable income.
- Interest on the settlement – If interest accrues on your award before you receive it, the interest portion may be taxable.
- Lost wages in non-physical claims – If you receive damages for lost income in a case unrelated to a physical injury, these wages may be taxable.
- Medical expenses previously deducted – If you deducted medical expenses related to your injury on a prior tax return and later received reimbursement for those expenses in your settlement, you must include that portion as taxable income.
Illinois follows federal tax treatment for personal injury settlements. If the settlement is excluded from federal taxable income, it will also be excluded from Illinois state income taxes.
How a Geneva Personal Injury Lawyer Can Help
Settlements often cover multiple categories of damages; it is not always clear which portions are taxable. An experienced personal injury attorney can help structure the settlement agreement in a way that clearly allocates damages to physical injuries where appropriate, reducing the risk of unnecessary taxation. Additionally, you should consult a tax professional to ensure you comply with all reporting requirements and avoid potential penalties for nonpayment of taxes.
Contact An Experienced Injury Attorney for Help
Most personal injury settlements in Illinois are not taxable when they compensate you for physical injuries or sickness. However, certain portions can be taxable. If you are considering a settlement or have questions about the tax impact, speak with both a knowledgeable personal injury lawyer and a tax advisor. Feagans Law Group offers free consultations to help you understand your rights.