Are personal injury settlements taxable?
Short answer
Usually not, for a physical injury.
- The IRS says a settlement for personal physical injuries or physical sickness isn't taxable, except the part for medical expenses you deducted in earlier years.
- Punitive damages and interest are generally taxable.
- Emotional distress is treated like a physical injury only when it comes from one.
Checked October 19, 2026.
Sources: Internal Revenue Service, Publication 4345, Settlements: Taxability (Rev. 9-2023); 26 U.S.C. 104(a), Compensation for injuries or sickness. Every fact cites a source
What the IRS says
General information from the IRS and the federal tax law, not tax advice for your settlement.
A settlement for personal physical injuries or physical sickness. Only a part for medical expenses you deducted in earlier years can be taxed.
Punitive damages are taxable even in a settlement for a physical injury. Interest on a settlement is generally taxable too.
The parts that can be taxed
A settlement can pay for more than one thing, and the IRS treats each part by what it pays for.
The part of a physical injury settlement for medical expenses you deducted in an earlier year is income, to the extent the deduction gave you a tax benefit.
Source: Internal Revenue Service, Publication 4345, Settlements: Taxability (Rev. 9-2023)From a physical injury or sickness, it's treated the same as the injury. Otherwise it's income, reduced by medical expenses for the distress that you hadn't deducted.
Source: Internal Revenue Service, Publication 4345, Settlements: Taxability (Rev. 9-2023); 26 U.S.C. 104(a), Compensation for injuries or sicknessTaxable, even when they come in a settlement for a physical injury.
Source: Internal Revenue Service, Publication 4345, Settlements: Taxability (Rev. 9-2023); 26 U.S.C. 104(a), Compensation for injuries or sicknessInterest on any settlement is generally taxable.
Source: Internal Revenue Service, Publication 4345, Settlements: Taxability (Rev. 9-2023)Workers' comp benefits
Amounts received under workers' compensation acts as compensation for personal injuries or sickness are left out of income.
Source: 26 U.S.C. 104(a), Compensation for injuries or sicknessWorkers' compensation is on the state's list of exempt, nontaxable income.
Source: New Jersey Division of Taxation, Exempt (Nontaxable) IncomeSources
- Internal Revenue Service, Publication 4345, Settlements: Taxability (Rev. 9-2023)Which parts of a settlement the IRS taxes. Checked .
- 26 U.S.C. 104(a), Compensation for injuries or sicknessThe federal law that leaves physical injury damages and workers' comp out of income. Checked .
- New Jersey Division of Taxation, Exempt (Nontaxable) IncomeWorkers' comp is exempt from New Jersey income tax. Checked .
General information, not legal advice. We don't know the facts of your claim. A lawyer can review them, and most injury lawyers offer a free consultation.
What to do next
- Next questionBefore you accept an insurance settlement offerWhat to check before you sign a settlement offer.
- Ready to call a firm?Your first injury lawyer consultationWhat to bring, what to ask, and what the fee agreement must say.
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Questions people ask
Do you pay taxes on a personal injury settlement?
Generally not on the part for a physical injury. The IRS says a settlement for personal physical injuries or physical sickness isn't taxable, unless part of it is for medical expenses you deducted in an earlier year. Punitive damages and interest are taxable.
Is a settlement for emotional distress taxable?
It depends where the distress comes from. The IRS treats emotional distress from a physical injury or sickness the same as the injury. Distress that doesn't come from one is income, reduced by medical expenses for it that you hadn't deducted.
Are punitive damages taxable?
Yes. The IRS says punitive damages are taxable even when they come in a settlement for personal physical injuries or physical sickness.
Is interest on a settlement taxable?
Generally, yes. The IRS says interest on any settlement is generally taxable as interest income.
Is workers' comp taxable?
Federal law leaves amounts received under workers' compensation acts for personal injuries or sickness out of income. New Jersey lists workers' compensation as exempt from its income tax.