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Like everything with the Internal Revenue Service (IRS), the answer is that it is complicated. It depends on the circumstances, and you should always check with a professional. However, do not worry about the federal government taking a large portion of your personal injury settlement. For the most part, personal injury settlements are not taxable.
According to the IRS, if you receive a settlement for personal injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury, the full amount of your settlement is not taxable. The same is true for emotional distress or mental anguish damages. Always check with an accounting professional to ensure that you have not fallen into one of the many exceptions in the tax law.
However, damages for lost wages and lost profits are subject to income tax as well as any punitive damages. You can always ask your attorney what kind of damages you are seeking so that you can be prepared for any tax implications. The rules are complex, and it is always best to consult a professional.
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