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Is my injury settlement taxable?
Under federal law the part of a settlement paid for a physical injury is generally tax-free, including medical bills, lost wages and pain and suffering from that injury. Punitive damages and money for harm with no physical injury behind it are generally taxable. In the example below, $100,000 splits into $85,000 tax-free and $15,000 taxable, which at a 22% rate is $3,300 of federal tax.
Rules from 26 U.S.C. 104 and the IRS page on settlements (reviewed June 28, 2026) · federal income tax only · general information, not tax or legal advice
How each kind of money is treated
The IRS sorts settlements by one question: "What was the settlement (and its corresponding payments) intended to replace?"
| Part of the settlement | Federal treatment | Source |
|---|---|---|
| Damages for a physical injury: medical bills, lost wages, pain and suffering | Excluded from gross income | 26 U.S.C. 104(a)(2); IRS Rev. Rul. 85-97 |
| Emotional distress that comes from the physical injury | Excluded from gross income | 26 U.S.C. 104(a) (distress tied to a physical injury) |
| Punitive damages | Taxable (narrow wrongful death exception) | 26 U.S.C. 104(a)(2), 104(c) |
| Emotional distress or lost pay with no physical injury behind it | Taxable (distress money up to medical care paid for it is excluded) | 26 U.S.C. 104(a), flush language |
| Repayment of medical costs you deducted in an earlier year | Taxable up to the deduction allowed | 26 U.S.C. 104(a), lead-in |
Worked examples
Federal tax at 22% and at 32% on the taxable part of a $100,000 settlement. The physical-injury share is tax-free in every row.
| Split of $100,000 | Taxable part | Tax at 22% | Tax at 32% |
|---|---|---|---|
| $100,000 physical injury damages | $0 | $0 | $0 |
| $85,000 physical injury, $15,000 punitive | $15,000 | $3,300 | $4,800 |
| $60,000 physical injury, $40,000 punitive | $40,000 | $8,800 | $12,800 |
| $100,000 distress or lost pay with no physical injury | $100,000 | $22,000 | $32,000 |
Computed as taxable part x rate. Pick your bracket from the IRS federal tax rates and brackets. State income tax, interest on a judgment, structured payments and legal fees can change the result.
What this calculator leaves out
It covers federal income tax on the split you enter. It does not decide how your settlement should be divided: that depends on the claim, the settlement agreement and the facts, and a tax professional can read them. The medical-care exception for distress money is not modeled: put that amount in the physical injury box. It does not cover state taxes, employment taxes, how legal fees are treated when part of the money is taxable, or periodic payments.
Car crash settlement amounts, fault rules and filing deadlines are on separate pages: the settlement calculator estimates a claim range and the filing deadline calculator shows each state's lawsuit deadline. A lawyer licensed in your state can tell you how your claim is likely to be valued.
Questions
Is a personal injury settlement taxable?
Usually not the part paid for a physical injury. Federal law excludes 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 physical injuries or physical sickness" (26 U.S.C. 104(a)(2)). Punitive damages and money for non-physical harm are generally taxable. State income tax rules can differ from the federal ones.
Are lost wages in an injury settlement taxable?
Not when they come from a physical injury. The IRS says it "has consistently held that compensatory damages, including lost wages, received on account of a personal physical injury are excludable from gross income with the exception of punitive damages." Lost pay from an employment dispute with no physical injury is different: the IRS says damages for economic loss such as lost wages "are not excludable" unless a personal physical injury caused the loss.
Is emotional distress money taxable?
It depends on what caused the distress. Under the statute, "emotional distress shall not be treated as a physical injury or physical sickness," so distress money is taxable unless it arises from a physical injury or sickness. The statute carves out an amount that does not exceed what was paid for medical care attributable to the emotional distress.
Are punitive damages taxable?
Yes, with one narrow exception. The IRS says punitive damages "are not excludable from gross income," except in a wrongful death action where state law, as it stood on September 13, 1995, provides only for punitive damages (26 U.S.C. 104(c)). If that may apply to you, tick the box in the calculator and ask a tax professional.
What if I deducted my medical bills on an earlier tax return?
The exclusion does not cover amounts "attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year." If a settlement repays medical costs that you deducted, that part can be taxable. Enter it in the last box.
Does the wording of the settlement agreement matter?
The IRS says that "in some cases, a tax provision in the settlement agreement characterizing the payment can result in their exclusion from taxable income," that it "is reluctant to override the intent of the parties," and that if the agreement is silent it looks to the intent of the payor. The key question it asks is what the settlement was intended to replace. A lawyer and a tax professional can check how your agreement describes each payment.
Will I get a Form 1099?
The IRS says defendants and insurers paying a settlement "are required to issue a Form 1099 unless the settlement qualifies for one of the tax exceptions." A physical-injury settlement that qualifies for the exclusion usually does not produce one. Receiving or not receiving a form does not change what the law says is taxable.