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Are Personal Injury Settlements Taxable in California?

It surprises many plaintiffs to discover that winning a personal injury lawsuit or accepting an insurance settlement offer doesn’t exactly mean “case closed.” There is still the matter of receiving the settlement or judgment check from the defendant…and then dealing with the extra money come tax season. The State of California and the federal Internal Revenue Service (IRS) may impose taxes on some or all of a personal injury settlement, depending on the circumstances. Here’s what you need to know about settlement taxation in California.

Federal Settlement Taxes

Most personal injury settlements include payments for different types of damages. For example, a car accident settlement may involve recovery for medical bills, lost wages, property damage, emotional distress, and attorney’s fees. The federal government will tax some, but not all, types of damages in an injury settlement. According to the IRS’s Settlements – Taxability guide, you may need to pay taxes on the following damages as a plaintiff:

The majority of personal injury settlements are tax-free. This means that unless you qualify for an exception, you will not need to pay taxes on your settlement check as you would regular income. The State of California does not impose any additional taxes on top of those from the IRS. Only a tax expert can give you 100% accurate details about which taxes you will and will not have to pay after receiving a personal injury settlement award in California. Seek professional help during tax time to make sure you obey the rules. Otherwise, you could end up paying tax penalties and fees.