Are insurance settlements taxable?

I had a work accident. My attorney negotiated a small settlement with the insurance company. IRS claims we owe tax on the settlement because our attorney reported the settlement amount as nonemplyoyee compensation paid to us. I thought insurance settlements were nontaxabel income?

asked by Lily in Personal Finance | 3761 views | 08-02-2009 at 12:01 AM

No. Personal injury proceeds are considered compensation of injuries and losses, it is not a "gain" or "windfall" under the tax codes.

Actually, whether personal injury damage awards are taxable depends on what the award is for. If it is to compensate for personal physical injuries or sickness, then it's not taxable (IRC Section 104(a)(2)). Emotional injury that is the result of physical injury may not be taxable; however emotional injury that is the result of nonphysical injury (for instance, defamation or trespass) is generally taxable.

answered by Hunter | 08-02-2009 at 12:03 AM

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