Is my personal injury settlement taxable?

Generally, no. Under IRC Section 104(a)(2), compensation received for physical injuries or physical sickness is excluded from gross income. This includes settlements for medical expenses, pain and suffering from physical injuries, and lost wages due to physical injury.

Are employment settlements taxable?

Usually, yes. Back pay, front pay, and most employment-related settlements (discrimination, harassment, wrongful termination) are treated as wages subject to income tax and employment taxes. However, amounts allocated to physical injury or physical sickness may be excludable.

Is emotional distress settlement taxable?

It depends. Emotional distress damages are generally taxable UNLESS they stem from a physical injury. If emotional distress is caused by a physical injury (e.g., PTSD from a car accident), it may be excludable. Pure emotional distress without physical injury is taxable.

Are punitive damages taxable?

Yes, always. Punitive damages are fully taxable regardless of the type of case. They are designed to punish the defendant, not compensate you for injury, so they don't qualify for the physical injury exclusion.

Settlement Tax Calculator 2026 — Is Your Settlement Taxable? Find Out Free

💰 Settlement Details

Case Type

Primary Claim Type

Settlement Allocation

Physical Injury Compensation ($)

Medical bills, pain & suffering from physical injury

Emotional Distress from Physical Injury ($)

PTSD, anxiety, etc. caused BY the physical injury

Emotional Distress (No Physical Injury) ($)

Emotional harm without underlying physical injury

Lost Wages / Back Pay ($)

Past and future lost income

Punitive Damages ($)

Always taxable

Attorney Fees Paid ($)

Your attorney's portion of settlement

I don't have a signed settlement agreement yet

Check this if you're estimating before you sign. Allocation language in the agreement controls IRS treatment under IRC § 104(a)(2); pre-signing review is the better time to optimize.

Your Tax Bracket (Estimated)

Federal Rate (%)

CA State Rate (%)

📊 Tax Analysis

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Enter your settlement details to see the tax breakdown

The wording of your settlement is what gets taxed

A poorly drafted settlement, one lump sum instead of damages allocated by category, is exactly what an attorney demand letter or settlement-agreement review fixes. The allocation language in the agreement controls IRS treatment under IRC § 104(a)(2), so getting it right before you sign is what protects your after-tax recovery. That is the work my $575 Attorney Demand Letter / settlement review package does.

I'm Sergei Tokmakov, a California attorney (CA Bar #279869). I draft the demand or review the settlement wording, you review it, and I send it on firm letterhead. Attorney-supervised work product, not legal advice. Start the package and I follow up by email.

Settlement Tax Rules (IRC 104)

Physical Injury Compensation

Under IRC Section 104(a)(2), damages received on account of physical injuries or physical sickness are excluded from gross income. This includes medical expenses, pain and suffering, and lost wages caused by the physical injury.

Generally Tax-Free

Emotional Distress Damages

Emotional distress damages are taxable UNLESS they originate from a physical injury. If you developed PTSD from a car accident, that's excludable. If you have emotional distress from workplace harassment without physical injury, it's taxable.

Depends on Origin

Employment Settlements

Back pay, front pay, and most employment settlements are taxable as ordinary income. They're also subject to employment taxes (FICA). Even discrimination and harassment settlements are generally taxable unless allocated to physical injury.

Generally Taxable

Punitive Damages

Punitive damages are ALWAYS taxable, regardless of the underlying claim. They're designed to punish the defendant, not compensate you, so they don't qualify for any exclusion.

Always Taxable

Attorney Fees

In most cases, you're taxed on the gross settlement (including attorney fees), then deduct the fees. For employment and certain civil rights claims, you may be able to deduct fees "above the line." Consult a tax professional.

Complex Rules

Important Tax Disclaimer

This calculator provides estimates for educational purposes only. Tax treatment of settlements is complex and fact-specific. Settlement allocation in your agreement matters significantly. Always consult a tax professional or CPA before finalizing any settlement. Terms.Law is not a tax advisor.