Will I Be Taxed on My Personal Injury Settlement?

Achieving a successful outcome in a personal injury claim is a significant milestone. But once the damages are awarded and paid, personal injury victims must navigate taxation issues. These considerations include federal taxes calculated by the Internal Revenue Service (IRS) and the State of Kentucky. With Kentucky’s tax burden nearly 10%, understanding tax implications on a personal injury settlement is crucial. 

At Caleb Bland Law, PLLC, we go the extra mile to serve our clients with all the support they need to get the most out of their personal injury settlements. Our personal injury attorney proudly serves Elizabethtown as well as neighboring areas in Hardin County, Meade County, Grayson County, Breckinridge County, Nelson County, LaRue County, and the rest of Kentucky. Set up a one-on-one consultation today. 

IRS and State Taxes After Receiving Compensation 

If a person receives compensation in Kentucky for physical and non-physical damages, emotional distress for injuries, and punitive damages, this money may be subject to IRS and state taxes. Here’s how each type of compensation may be taxed: 

Physical and Non-physical Damages 

The compensation received for physical and non-physical damages is generally not taxable by the IRS or the state of Kentucky. This includes compensation for medical expenses, lost wages, and pain and suffering. 

Emotional Distress 

Compensation for emotional distress related to a physical injury is generally not taxable by the IRS or the state of Kentucky. However, compensation for emotional distress unrelated to a physical injury may be taxable by the IRS and Kentucky. 

Punitive Damages 

Punitive damages are intended to punish the defendant for their actions. They are generally taxable by the IRS and the state of Kentucky as ordinary income. These damages are typically subject to the ordinary income tax bracket. 

Exceptions to Taxation After Receiving Compensation  

There are some exceptions to taxation after receiving compensation in Kentucky for a personal injury claim that involves physical and non-physical damages, punitive damages, and emotional distress. These exceptions may include workers’ compensation, disability benefits, medical expense deductions, and attorney fees. 

Workers’ Compensation 

The compensation received through a workers’ compensation claim is generally not taxable by the IRS or Kentucky. 

Disability Benefits 

If a person receives disability benefits from a private policy or the Social Security Administration, the compensation is typically not taxable by Kentucky. However, the victim may be required to pay federal income taxes on the compensation. 

Medical Expenses 

If a victim has incurred medical expenses related to their injuries, they may be able to deduct them from their taxes. This deduction applies to expenses that exceed 10% of their adjusted gross income. 

Attorney Fees 

If an accident victim hires an attorney to help with their personal injury claim or lawsuit, they may be able to deduct the fees from taxes as a miscellaneous itemized deduction. 

Taxable Personal Injury Damages

The tax rate on taxable personal injury damages in Kentucky and by the IRS depends on the type of compensation received and the recipient’s income tax bracket. Always reach out to an attorney for guidance on your specific case, but the following situations highlight applicable IRS and Kentucky state taxes: 

Punitive Damages 

Punitive damages are taxed as ordinary income by both the IRS and the state of Kentucky. The tax rate for ordinary income is a flat 4.50% in Kentucky. However, depending on the recipient’s bracket, IRS income tax rates range from 10% to 37%. 

Interest on Personal Injury Awards 

The tax rate on interest earned on a personal injury award is the same as the recipient’s ordinary income tax rate, generally a flat 4.50% in Kentucky. Nevertheless, an individual’s IRS tax bill can range from 10% to 37%, depending on their specific bracket. 

Emotional Distress Damages 

Compensation for emotional distress related to a physical injury is generally not taxable by the IRS or the state of Kentucky. However, compensation for emotional distress unrelated to a physical injury may be taxable as ordinary income. The same rates apply as punitive and interest on personal injury awards. 

Lost Wages and Benefits 

The compensation received for lost wages and benefits is generally taxable as ordinary income by the IRS and the state of Kentucky. Like emotional distress unrelated to injuries, punitive damages, and interest on personal injury awards, both the Kentucky and IRS tax rates apply. 

Get Trusted Legal Counsel

After all is said and done, you should be able to move forward with confidence once you’ve received your settlement. At Caleb Bland Law, PLLC, we understand how difficult it can be to navigate the legal system—and we recognize that no one should have to go through this alone. That’s why our mission is to help accident victims navigate state and federal taxes laws and get the compensation they deserve. Set up a simple consultation with our attorney when you are ready to get started.