Are Personal Injury Settlements Taxable in Indiana?

The Short Answer

The majority of personal injury settlements are not taxed at the state or federal level. Personal injury settlements are designed to return you to the condition that you were in before the accident or injury. Therefore, any settlements related to a physical illness or injury, such as a car accident, truck accident, or slip and fall, are exempt from state and federal income tax. But while compensatory damages for medical bills and pain and suffering are excluded, interest and other damages can be considered income.

Key Takeaways

The IRS excludes damages from personal injuries or illnesses from gross income pursuant to IRC § 104(a)(2).
Indiana provides similar exceptions to ensure that damages related to your injuries and medical bills are not subject to state income tax.
Court verdicts and settlements often include several types of damages, so income tax may apply to part of the settlement.
You do not need to pay income tax on damages for medical bills, pain and suffering, or lost wages.
Punitive damages and interest that the settlement yields are taxable.

What’s my case really worth?

What Personal Injury Damages Are Not Taxable?
What Personal Injury Damages Are Taxable?
Are Wrongful Death Settlements Taxable by the IRS?
How to Divide a Wrongful Death Settlement
How Are Personal Injury Settlements Paid Out?
Tips for Reporting Personal Injury Settlements
Personal Injury Settlement Taxability FAQs
Schedule a Free Consultation
Related Articles & Info

What Personal Injury Damages Are Not Taxable?

Damages that directly relate to your injury are not taxed by the state or federal government. This includes compensation for medical bills, lost wages, pain and suffering, and emotional distress. Here are a few examples.

Settlement Component	Taxable	Explanation
Compensatory Damages for Injuries	No	Excluded under both federal and Indiana law
Medical Bills (if not previously deducted)	No	Considered restitution, not income
Pain and Suffering From Injury	No	Non-taxable as part of personal injury damages
Emotional Distress From Injury	No	Excluded if stemming from a physical cause
Lost Wages/Loss of Financial Support	No	Not taxable when related to an injury
Survival Action Damages for Wrongful Death	No	Covers injury-related expenses incurred by the decedent

What Personal Injury Damages Are Taxable?

Some damages in personal injury settlements or verdicts are treated as income, so you may have to pay tax on part of the total award. Interest and damages that are unrelated to the injury are taxable.

Settlement Component	Taxable?	Explanation
Punitive Damages	Yes	Considered taxable income
Interest	Yes	Treated as interest income
Emotional Distress (non-physical cause)	Yes	Taxable unless linked to a physical injury
Previously Deducted Medical Expenses	Yes	Must be included in income if deducted in prior years

Are Wrongful Death Settlements Taxable by the IRS?

The IRS states that lawsuit settlements awarded for a physical illness or injury are not taxable as gross income if the damages are compensatory. Wrongful death settlements fall under this category because a negligent party was responsible for causing the fatal accident or illness. This means that the decedent incurred additional expenses through no fault of their own.

Some damages in a wrongful death case may be taxed as income. These include punitive damages designed to punish the negligent party and any interest that the settlement earns. Damages for medical bills, emotional trauma, and loss of financial support are not taxable. You’ll receive a 1099 at the end of the year showing which part of your settlement must be reported on IRS Form 1040 and Indiana IT-40. Here’s a breakdown showing when wrongful death settlements are taxed.

Component	Taxable Federally?	Taxable in Indiana?
Physical Injury	No	No
Emotional Distress (accident-related)	No	No
Lost Wages/Financial Support	No	No
Punitive Damages	Yes	Yes
Settlement Interest	Yes	Yes

How to Divide a Wrongful Death Settlement

Wrongful death settlements are unique because they’re designed to benefit multiple parties. Following a fatal accident, compensation often goes to the decedent’s estate. Additional benefits are designed to compensate surviving families for their losses. Wrongful death benefits are typically divided using the following categories.

The Estate

Survival action damages go directly to the decedent’s estate. These payments compensate the person for medical bills, pain and suffering, and losses experienced before their death. Because the person could have sued for these losses if they were still living, settlements or verdicts go directly to the person’s estate. They’re ultimately distributed according to the person’s will. Indiana repealed its estate tax several years ago, so you shouldn’t owe any additional taxes.

Surviving Family Members

A significant portion of wrongful death damages go directly to surviving family members, such as the person’s spouse, children, parents, or next of kin. Benefits for survivors include loss of financial support, loss of companionship, loss of household services, such as childcare, and compensation for final expenses.

Minor Children

Wrongful death benefits that are distributed to minors are typically held in a trust or guardian-controlled UTMA/UGMA account. Annuities can provide fixed payments once the beneficiary reaches majority age.

How Are Personal Injury Settlements Paid Out?

Once you’ve reached a favorable agreement and signed all the paperwork, you may be wondering how your personal injury or wrongful death settlement will be paid out. There are 3 main payment options, including lump-sum, structured settlements, and hybrid agreements. Here’s how they work.

Lump Sum: As the name implies, lump-sum settlements provide a one-time payment to reimburse you for damages. This option is convenient, but it can have tax implications as any taxable proceeds will be recorded in a single year.
Structured: Similar to an annuity, structured settlements pay out a fixed or variable amount over a set period of time, such as 6 months or 10 years. While this can provide consistent income, the value of payments can depreciate over time due to inflation.
Hybrid: With a hybrid settlement, you get part of your payment upfront in addition to ongoing payments to cover the remainder of the amount owed. This option can help you spread any taxable benefits over multiple years.

Tips for Reporting Personal Injury Settlements

Personal injury settlements and verdicts can create complex tax liability concerns. For best results, consult a CPA or tax professional before you reach a settlement to determine which parts of the award will be taxable. Your attorney may be able to use their negotiation skills to increase the amount of non-taxable damages while reducing taxable compensation. At the end of the year, you may receive a 1099-MISC or 1099-INT showing what portion of the settlement is subject to federal income taxes.

Personal Injury Settlement Taxability FAQs

Are Car Accident Settlements Taxable?

Generally, car accident settlements are not taxable if they compensate you for physical injuries. Compensation for medical bills, pain and suffering, vehicle repairs, and lost wages is typically excluded from gross income. Taxes may apply to any interest that the settlement earns or punitive damages levied against the other driver. For accurate guidance, consult an attorney or tax professional about your case.

Are Slip and Fall Settlements Taxable?

Settlements for slip and fall lawsuits are generally not taxable, although there are some exceptions. As long as the damages are reimbursing you for financial and/or emotional losses that are directly related to a physical injury or illness, the award is not subject to state or federal income tax. Consult an attorney or accountant to see how tax laws may apply to your slip and fall case.

Are Settlements From Product Liability Lawsuits Taxable?

It depends on the type of damages awarded, but settlements from product liability lawsuits are typically non-taxable. Per Internal Revenue Code Section 104, compensatory damages related to a personal injury or illness, such as an adverse drug reaction, do not need to be reported as income. If your product liability case resulted in property damage, such as a house fire, damages needed to restore your property to its original condition are generally not taxable. Interest and non-compensatory damages may be taxed, so speak with an attorney or CPA for more details.

Schedule a Free Consultation

Recovering from an accident or injury takes considerable time and financial resources. Contact an experienced Indiana personal injury lawyer at The Ken Nunn Law Office for assistance with your case. For more than 50 years, our team has put our experience to work for families in Indianapolis and Central Indiana. To see if you’re entitled to compensation, contact us online, or call us now at 1-800-CALL-KEN.