Many of our clients ask us about taxes when we start getting close to a settlement with an insurance company. The short answer in Washington is generally no taxes are owed on money received in settlement of a personal injury claim.
Restitution for a loss is not considered income for tax purposes. According to current IRS law, if an injured person obtains a settlement from an at fault third party (for example, from the at fault driver who hit you), that settlement money is not taxable.
Of course there are always exceptions, nothing in the law seems to be black and white. The IRS generally taxes punitive damages. What are punitive damages? Punitive damages are money that a defendant is ordered to pay over and above the full value of a case. They serve as an additional punishment given to a defendant in cases of outrageous conduct. However, in Washington State punitive damages are not usually available for injury claims.Oftentimes when you hear about huge verdicts in the media from car accidents the case is from another state that allows punitive damages in injury cases.
If you are thinking about accepting an insurance company's settlement offer it might be a good idea to give an experienced Washington injury attorney a call to review your rights and make sure you're doing the right thing.
Another option is order my free book for Washington residents “The Guide to Washington Injury Cases.” The book has good quality information for you to use in handling your injury claim.