Does California Tax Personal Injury Settlements?
Yes, in most cases, your personal injury settlement is taxable under IRS and California rules. The IRS outlines its personal injury settlement tax rules in Publication 4335, detailing the taxability of personal injury settlement, including which damages are considered taxable and which aren’t.
When you receive a settlement from a personal injury lawsuit, you must report the income to the IRS. The settlement is considered taxable income, even if you don’t receive a 1099 form from the insurance company. In California, personal injury settlements are also taxable, and you must report the income to the California Franchise Tax Board.
In California, the taxable portion of a personal injury settlement is based on the type of damages you receive. If you receive compensation for medical expenses, lost wages, or property damage, these are considered taxable. However, damages for pain and suffering, emotional distress, and punitive damages are not taxable.
If you receive a settlement for lost wages, you must report the income on your federal and state tax returns. The amount of income you report should be the same as the amount of wages you would have earned if you had not been injured. For example, if you were injured in an accident and received a settlement for lost wages, you would report the amount of wages you would have earned if you had not been injured.
If you receive a settlement for medical expenses, you must report the amount of the settlement on your federal and state tax returns. However, you can deduct the amount of medical expenses you paid out of pocket from the settlement amount. For example, if you received a settlement for medical expenses of $10,000, but you paid $2,000 in medical expenses out of pocket, you would only report $8,000 as taxable income.
When you receive a settlement for pain and suffering, emotional distress, or punitive damages, you do not have to report the income on your federal or state tax returns. These types of damages are not considered taxable income.
In California, you must report any personal injury settlement on your state tax return. The taxable portion of the settlement is based on the type of damages you receive. Damages for medical expenses, lost wages, and property damage are taxable, while damages for pain and suffering, emotional distress, and punitive damages are not taxable. When you receive a settlement, make sure to report the income to the IRS and the California Franchise Tax Board.
