February 19, 2026 | Personal Injury
Federal Tax Law and Personal Injury Settlements
The Internal Revenue Service (IRS) generally excludes damages received for a personal injury from taxable income. Essentially, this means that compensation for medical bills, pain and suffering, and similar losses tied to a physical injury is usually not subject to tax.This rule applies regardless of whether the settlement comes from a car accident or another type of personal injury claim. As long as the damages are directly connected with a physical injury, they are typically not subject to federal income tax.However, the law does distinguish between different types of damages. Certain components of a settlement may still be taxable even if they arise from the same accident.What Types of Damages May Be Taxable?
Not all settlement funds are treated the same way for tax purposes. Certain categories of damages are more likely to be taxed, depending on the facts of the case and how the settlement is structured.Common examples of potentially taxable damages include:- Punitive damages
- Interest that accrues on the settlement
- Emotional distress that is not tied to a physical injury
- Medical expenses that were deducted in a previous tax year
- Lost wages and lost profits in certain situations
Tennessee State Tax Considerations
Tennessee does not impose a traditional state income tax. As a result, most personal injury settlements in Nashville are not taxed at the state level. This can provide at least some reassurance for accident victims who are trying to recover financially after an injury.However, federal tax rules still apply. The absence of a state income tax does not mean that every part of a settlement is automatically tax-free. The federal classification of each damage category will still control how the payment is treated.The Impact of Your Settlement’s Structure
The way a settlement is written can play a role in how it is taxed. Settlement agreements often divide the total award into categories such as medical expenses and pain and suffering. These labels are not just formalities. They can influence how the IRS evaluates the payment in question.For example, an award clearly designated for physical injury damages is more likely to be excluded from taxable income. On the other hand, amounts specifically identified as punitive damages will usually be treated as taxable.With this framework in mind, careful drafting of the settlement agreement is often important. The language used can affect the financial outcome long after the case has concluded.Contact the Nashville Personal Injury Attorneys at Minner Vines Injury Lawyers, PLLC for Help Today
Personal injury settlements in Nashville are often not taxable when they are based on compensation for physical injuries. However, certain portions of an award may still be subject to federal taxes depending on how the damages are categorized.If you have questions about the tax implications of a personal injury settlement, it’s likely worth your time to reach out to an experienced professional. That’s where Minner Vines Injury Lawyers, PLLC can help. Contact us today to schedule a free consultation with a Nashville personal injury lawyer.If you’ve been injured in an accident in Lexington or Bowling Green, please contact our car accident lawyers at Minner Vines Injury Lawyers, PLLC for a free case evaluation.Minner Vines Injury Lawyers, PLLC – Lexington, KY Office 325 W Main St #210, Lexington, KY 40507 (859) 550-2900
Minner Vines Injury Lawyers, PLLC – Nashville Office 49 Music Square W #504, Nashville, TN 37203 (615) 676-7060