Do I pay taxes on my compensation?

The short answer is, no. Monies recovered from a personal injury settlement or damages awarded at a trial are not taxable by either the state of New Jersey or the federal government. You pay no taxes on whatever money we recover for you.

Now, if you receive Social Security disability, this may impact money awarded by a court. But that’s something you can discuss with your certified personal injury lawyer.

This is your money, that you’re getting to compensate for a terrible accident or a horrific injury, and neither the state government nor the federal government has any claim to it. (Plus, we think we can agree we all pay too much in taxes already.)

Here’s the I.R.S.’s official laws on the question of taxing money recovered from a personal injury lawsuit:

IRC Section 61 explains that all amounts from any source are included in gross income unless a specific exception exists. For damages, the two most common exceptions are amounts paid for certain discrimination claims and amounts paid on account of physical injury.

IRC Section 104 explains that gross income does not include damages received on account of personal physical injuries and physical injuries.

IRC Section 104(a)(2) permits a taxpayer to exclude from gross income “the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or physical sickness

Reg. Section 1.104-1(c) defines damages received on account of personal physical injuries or physical sickness to mean an amount received (other than workers’ compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution.

(https://www.irs.gov/government-entities/tax-implications-of-settlements-and-judgments)