Each settlement is different and any questions about how to prepare or file tax documents with the Internal Revenue Service or the California Franchise Tax Board (or any other state tax collection agency) should be handled on a case-by-case basis. That being said, the general rule of thumb is that “income” is taxable, and other sources of revenue often are not. This means that a portion of a settlement designated as lost wages – i.e. compensation for income that you lost due to an injury – is likely taxable as income. However, settlement funds meant to compensate for pain and suffering, or compensate for the costs of medical care are usually not. However, it is important that you get specific advice from either your tax preparer or the an experienced personal injury attorney to better understand the tax consequences of a personal injury settlement.
