clip art of taxesAccording to recent statistics, about 95% of lawsuits are settled before going to trial in the United States. In Illinois, the percentage jumps to 98%. This means that just about 1 in 50 cases will be resolved in court. As such, settlement is the most common way to be compensated for a personal injury case these days. When you get a settlement check, you may be wondering if you will have to pay taxes on the amount. Good news: In Illinois, a personal injury settlement is typically not subject to taxes. 

Why is that? They’re usually tax-free because the award is not considered gross income. The law sees it as compensation for a loss. However, there are a few minor exceptions to this.

We’re going to explain how this works below. Keep reading for more. 

If you have specific questions about taxes in regards to your settlement, talk to a certified public account (CPA) in your area. They can guide you through this process.

When Are Personal Injury Settlements Tax-Free?

When a personal injury settlement compensates someone for physical injuries and other losses, their settlement is generally not taxable because it is not recognized as earned income. Let’s say the settlement also reimburses the plaintiff for medical bills related to the treatment of their injury. This portion of the settlement would also be tax-free. 

Let’s break this down. What is tax-free?

  • Compensation for physical injury or physical sickness
  • Compensation for pain and suffering and/or disfigurement (AKA non-economic damages)
  • Compensation for emotional distress due to physical injury or sickness
  • Compensation for medical expenses

When Are Personal Injury Settlements Taxed in Illinois?

Let’s say a personal injury lawsuit goes to trial, and the jury finds it in favor of the plaintiff. The jury awards the plaintiff compensation for their physical damages. They also award the plaintiff punitive damages. 

Generally, the amount from punitive damages will be taxable. Punitive damages are intended to punish the defendant for willful, wanton, or reckless actions, such as driving under the influence or selling a dangerous product. 

Other types of settlements could be taxable. Talk to a CPA if you have questions about your personal injury settlement.

Injured Due to Someone Else’s Negligence? Contact a Chicago Personal Injury Lawyer Today

If you were injured as a result of someone else’s negligence, there is hope. Our personal injury attorneys understand what you’re going through, and we’re here to guide you and your family through this difficult time. Contact us today for a free consultation at (312) 578-9501. You can also fill out the form on this page to get started. We look forward to speaking with you!

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