Vlog: Taxability of Personal Injury Settlement Money

Hi guys. Matt Clendenin here. This week I want to hit one very brief topic and that is the tax ability of personal injury settlement money. When I'm talking about settlement money, I'm talking about money that you, the client gets. Obviously the lawyers, we pay our income taxes, but when it comes to the client's money, everyone asks me, Hey Matt, do I have to report this to my accountant? Is the IRS gonna charge me for this at the end of the year? And thankfully the answer to that question in the vast majority of cases is no, this is not income. If you get money from a personal injury case, that's a reimbursement for money that you have already lost. So the IRS doesn't care. It's not reported. You don't have to tell your accountant about it. It's tax free money.

There's two primary exceptions to that. And the first exception is for punitive damages. If you get punitive damages in your case, those are taxable. And the second instance is payments for confidentiality. If part of your case goes to payment of confidentiality, that is payment for a service and that's taxable. So when you do a release, it's very important that the lawyers draft that release. There's actually a famous case involving Dennis Rodman, that the IRS went after and found that Dennis Rodman didn't pay taxes on the portion of his case. That wasn't for a reimbursement, wasn't for personal injury losses, it was payment for confidentiality. So those are the two big exceptions. You have punitive damages and taxability of confidentiality clauses, but other than that, 99.9% of personal injury settlements are going to be tax free. So it's good news. Uncle Sam doesn't get to take a piece of your personal injury case. Take care guys.