Are Personal Injury Settlements Taxable? IRS Rules in WA

Last updated: October 21, 2026

You just signed the settlement papers, and the check should arrive next week. Then a friend asks, “Won’t the IRS take a big chunk of that?” Now you’re doing the math in your head.

Are personal injury settlements taxable? For most people hurt in a crash, the main part isn’t. The IRS doesn’t count money you receive for a physical injury as income, and Washington has no state income tax. But a few parts can be taxed. Here’s which ones, and what to check before you file.

The short answer: Money for a physical injury or sickness is generally not taxable. That’s true whether it’s paid at once or over time. Emotional distress tied to that injury isn’t taxed either. Interest and punitive damages are taxable. So is money for medical costs you already deducted. Washington has no individual income tax.

Doctor helps a patient with her arm in a sling

Are personal injury settlements taxable?

Usually not the main part. The IRS says damages for a personal physical injury or physical sickness aren’t part of your income. That’s true for a lump sum or installments. That covers most of what a crash settlement pays for: medical bills, pain and suffering, and the other losses that come from the injury.

Part of the settlement	Taxable?
Damages for a physical injury (medical bills, pain and suffering)	Generally no
Emotional distress caused by the physical injury	Generally no
Emotional distress with no physical injury	Yes, except the part for medical care
Medical costs you deducted in an earlier year	Yes, to the extent the deduction lowered your tax
Interest on the settlement or award	Yes
Punitive damages	Yes, even in a physical injury case
Car damage, if less than what you paid for the car	Generally no

Sources: IRS Publication 525 (2025), “Court awards and damages,” and IRS Publication 4345 (Rev. 9-2023). General information, not tax advice.

Do you pay Washington state tax on a settlement?

No state income tax applies. The Washington Department of Revenue says the state does not currently have an individual income tax. So the question for most Washington residents is only the federal one. If you live in another state, or moved during the year, its rules may differ. Check with a tax professional.

Source: Washington Department of Revenue, Income tax.

Are lost wages in a personal injury settlement taxable?

It depends on what the money is for. When lost pay is part of damages for a physical injury, the IRS treats the injury settlement as non-taxable. Pay recovered in a job lawsuit, like a discrimination or firing case, is taxable wages. If your settlement lists lost pay separately, ask a tax professional how to report it.

IRS Publication 4345 says a settlement for personal physical injuries is generally non-taxable. It treats lost wages from job lawsuits as taxable wages.

Where the lost pay comes from	How the IRS usually treats it
A settlement for a physical injury	Part of the injury damages, generally not taxable
A job lawsuit, like discrimination or firing	Taxable wages
Interest added to an award	Taxable interest

Sources: IRS Publication 4345 and Publication 525 (2025). Ask a tax professional about your settlement.

Is emotional distress in a settlement taxable?

Not when it comes from a physical injury. The IRS treats emotional distress from a physical injury as part of the injury, so it’s not income. But distress that isn’t from a physical injury, like harm to your reputation, is taxable. The part that paid for medical care is the exception.

That matters after a crash where someone saw a terrible collision but wasn’t hurt. See PTSD from a car accident.

Close-up of a car's crushed front bumper and headlight after a crash

What parts of a settlement are taxable?

Three parts can be. Interest on a settlement or court award is taxable. Punitive damages are taxable, even in a physical injury case. And if you deducted medical costs on an earlier return, the part that repays them can be taxable. That’s only to the extent the deduction lowered your tax.

Example only: a settlement with one taxable part

Settlement$60,000

−

Medical costs you deducted last year$3,000

Generally not taxable$57,000

Example only. The $3,000 may be reportable if the deduction gave you a tax benefit. See “Recoveries” in IRS Publication 525. Ask a tax professional about your numbers.

Is a property damage settlement taxable?

Usually not. The IRS says money for a loss in a property’s value isn’t taxable when it’s less than your adjusted basis. That’s roughly what you paid for the car plus improvements. You lower your basis by the amount instead. Only a payment above your basis counts as income, and car repair money rarely gets there.

Source: IRS Publication 4345, “Loss-in-value of property.” See diminished value after a car accident.

Does the wording of your settlement affect taxes?

It can. A settlement may split the money into parts, like injury damages, lost pay, or interest. The IRS says it generally won’t change that split if it matches what the claims were really about. So read how your release describes the payment before you sign, and ask your lawyer or a tax professional if any part seems unclear.

Read how the release describes each part of the payment.
Check whether any interest or punitive damages are included.
Find out if you deducted crash medical bills on an earlier return.
Keep the release and the final settlement statement with your tax records.
Ask a tax professional before you file.

We aren’t tax advisors, and we’ll tell you so. But we’ll explain how your settlement is described, so your tax professional has what they need. See what comes out of a settlement.

Are wrongful death settlements taxable?

The same IRS rules generally apply. Money paid because of a death caused by a physical injury is usually treated like other physical injury damages, while interest and punitive damages are taxable. Because a death case has two claims and several family members, how the money is divided can matter. Talk to a tax professional before the settlement is signed.

Read how wrongful death settlements work in Washington and how personal injury settlements are paid out.

FAQ

Do you pay taxes on personal injury settlements paid over time?

The IRS rule for physical injury damages applies whether you get a lump sum or installments. Interest on payments can still be taxable.

Is a car accident settlement taxable?

Usually not the part for your injuries. Car damage is usually not taxable either. Interest and punitive damages can be.

Do I report a non-taxable settlement on my tax return?

IRS Publication 4345 says not to include non-taxable physical injury proceeds in your income. Report any taxable parts, like interest.

Is the lawyer’s fee taxed?

For the non-taxable part, it generally isn’t an issue. For taxable parts, the IRS counts fees as income too. Ask a tax professional.

What does No Win, No Fee mean?

You pay nothing up front. Our fee comes out of the money we win for you. No hourly bills. No retainer. If we don’t win, you owe us nothing. Not even the case costs.

Talk to Rich before you settle

Are personal injury settlements taxable? Mostly not, but the details are worth checking before you sign. If you were hurt by another driver, call Rich Martin. He has handled more than 2,000 injury cases in 28 years and taken more than 30 to a jury. He was named to the National Association of Distinguished Counsel’s Nation’s Top One Percent in 2023 and 2024.

We help people in Bellevue, Seattle, Tacoma, and across Washington. Your case review is free. No Win, No Fee. We speak English and Korean.

Call (425) 635-2000 or see how we handle injury cases.

Are Personal Injury Settlements Taxable in Washington?