Do You Have to Pay Taxes on the Mental Anguish Portion of a Personal Injury Settlement?

Written by James Hirby and Fact Checked by The Law Dictionary Staff  

As a plaintiff in a personal injury lawsuit, there are several different means by which you can seek redress. As you might imagine, you're entitled to seek full compensation for the medical costs that can be directly attributed to your injury. For instance, you can submit an itemized medical bill for treatments related to broken bones, blood transfusions, physical therapy, surgeries and more. You may also sue to secure compensation for the cost of ongoing treatments and follow-up visits. If you were involved in a car accident, you might also be able to recover the value of your damaged or totaled vehicle.

Many personal injury lawsuits also involve a psychological component. If you experienced psychological trauma as a result of your injury, you might be entitled to compensation for it. This doesn't only include the costs associated with any therapy sessions that you attend or medications that you take.

It's important to distinguish "mental anguish" claims from punitive damage claims. In order to claim "mental anguish," you must be able to show that you were the victim of a particularly brutal accident or assault. A simple car accident probably wouldn't be sufficient: You would need to show that the incident involved a level of mental suffering that a normal person would never experience. If you could provide documentation of a diagnosed mental illness like post-traumatic stress disorder, you would significantly increase the likelihood of convincing a judge that you suffered from "mental anguish."

In some cases, you might be able to tie the psychological component of your personal injury case into its physical component. For instance, many sexual assault victims choose to link the two types of suffering. In this particular case, a violent and degrading physical act is directly responsible for the psychological trauma that the victim experiences. The two are inseparable. If your personal injury case involves such "inseparable" psychological harm, your "mental anguish" may be classified as "physical" for the purposes of your settlement award.

This distinction is important: Whereas settlements that compensate personal injury plaintiffs for physical injuries aren't taxable, settlements that cover mental injuries usually are. If you're thinking about adding a "mental anguish" component to your personal injury lawsuit, you should encourage your lawyer to tie the two together. If you're seeking punitive damages for your mental injuries, you won't be able to avoid paying taxes on your award. According to the IRS, you must pay regular income taxes on any punitive damages that can be tied to your psychological wounds.

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