Personal injury settlements can include payment for various damages, such as lost earning capacity, emotional distress, medical bills, attorney fees, and more.
While most financial compensation is considered taxable income, the IRS typically does not have involvement with injury settlements for damages associated with a settled claim.
According to the IRS, “If you received a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income.”
Therefore, a monetary settlement resulting from a physical injury or sickness is not considered income and is non-taxable on the Federal level in Massachusetts.
Similar to physical injury or sickness cases, settlements resulting from mental anguish or emotional distress follow the same rules and are not taxable.
Compensation for mental anguish or emotional distress that did NOT originate from a physical injury or sickness must be claimed as income. However, the amount claimed can be reduced by two factors.
You can deduct unclaimed medical expenses to reduce the amount you claim as income and any costs previously deducted for medical expenses you were not provided with a tax benefit.
This money may be taxable if you opt to use medical expenses related to your injury as part of an itemized deduction. According to the IRS, the settlement only needs to be claimed as income if a portion of the settlement was deducted in any prior year(s).
Generally speaking, personal injury settlements are non-taxable in Massachusetts, and settlement proceeds don’t have to be claimed as income.