Are Personal Injury & Medical Malpractice Settlements Taxable in Ohio?

In Ohio, most settlements for physical injuries, physical illness, medical expenses, and related pain and suffering are generally non-taxable. That’s because the purpose of these types of settlements is to make a victim whole again after suffering an injury – not to serve as income.

Exceptions do exist, so if you’ve recently received – or plan to receive – a personal injury or medical malpractice settlement, you may want to reach out to an experienced attorney. At Crandall & Pera Law, LLC, we can explain what portions of a settlement may be taxable and how state and federal tax laws apply to your unique situation.

Are personal injury settlements taxable?

Most personal injury settlements are non-taxable because the law excludes certain types of compensation from income.

Under Internal Revenue Code § 104(a)(2), the amount of damages received “on account of personal physical injuries or physical sickness” is not included in gross income, so generally, they are not subject to federal income tax. As a result, compensation for a physical injury or illness – such as medical expenses stemming from their injury – is typically non-taxable.

How the settlement is structured can also affect the outcome. For example, you can receive a structured settlement or a lump sum. Structured settlements spread payments over time. This may affect taxable amounts (such as interest), but the taxability of the settlement depends on the type of damages. Lump sums are easier (you get all the money in one payment) but may concentrate taxable portions, such as interest.

Are medical malpractice settlements taxable?

Medical malpractice settlements generally follow the same rules as personal injury settlements, meaning compensation is non-taxable for physical injury or illness. This includes compensation for physical injury, such as surgical errors or misdiagnosis that lead to harm, and economic damages.

Potential taxable portions of a medical malpractice settlement include punitive damages and interest.

Types of settlement compensation

People often assume everything is taxed or nothing is taxed, but settlement taxes are not uniform and depend on the nature of the damages. Whether you pay taxes depends on what the compensation is meant to cover. Different parts of a settlement may be treated differently for tax purposes.

Medical expenses

Medical expenses can include hospital bills, doctor’s visits, rehabilitation, and other necessary treatment. Compensation for medical expenses related to a physical injury or illness is generally non-taxable per federal law.

Pain and suffering

If pain and suffering are tied to a physical injury or illness, they are typically non-taxable. For example, if you were in a car accident and suffered from ongoing pain as a result of the crash, compensation received would generally be excluded from income.

If pain and suffering are experienced but not tied to a physical injury, compensation received may be taxable.

Lost wages

Lost wages awarded as part of a personal physical injury claim are generally non-taxable under federal law. However, lost wages may be taxable if they arise from non-physical injury claims or are otherwise treated as taxable income. You should always check with a tax professional before making assumptions.

Property damage

If property damage does not exceed the property’s adjusted basis – for example, your car is damaged, and your settlement covers the cost of the repair – the amount is generally not taxed. Any excess amount received may be considered taxable.

When a settlement may be taxable

Not all settlement money is treated the same. The IRS typically focuses on the purpose of the payment. Common taxable scenarios include punitive damages, interest on settlements or judgments, emotional distress payments, and reimbursement for previously deducted medical expenses.

Punitive damages

The purpose of punitive damages is to punish the defendant, not compensate the victim. Even in physical injury cases, punitive damages are often taxable.

Interest on settlements or judgments

Interest on settlements or judgments, including pre- and post-judgment interest, is generally taxable—even if the underlying settlement is not.

Emotional distress not tied to physical injury

Emotional distress damages are generally taxable unless they are attributable to physical injury or used to reimburse medical care related to emotional distress.

Reimbursement of previously deducted medical expenses

Based on 26 U.S. Code §111, if you deducted medical expenses in a prior year and later get reimbursed, that reimbursement portion may become taxable. For example, if you were in a car accident and claimed a deduction for $10,000 in medical expenses last year, but then this year, you received a settlement reimbursing you for those costs, the $10,000 may need to be reported as taxable income.

Real-world examples of taxable vs non-taxable settlements

To better understand how settlement payments are taxed, consider the following examples, which highlight that the tax treatment depends on what the compensation is intended to cover:

• Car accident settlement. Here, the medical expenses and the pain and suffering are tied to physical injury, so they are generally non-taxable.
• Defamation case. When emotional distress is not tied to physical injury, it is typically taxable.
• Settlement including punitive damages. Punitive damages are usually taxable, even if other parts of a settlement are not.
• Settlement with interest (pre- or post-judgment). The interest portion is typically taxable.

Do you have to pay taxes on insurance settlements?

Many people ask, “Is an insurance settlement taxable?” Here, the answer depends on what the payment is intended to cover.

Insurance payouts are taxed based on what they compensate for, not because they came from insurance. For example, auto accident settlements often include bodily injury liability coverage and are non-taxable if tied to physical injury. Similarly, liability insurance payouts depend on the types of damages covered, and other injury-related compensation is non-taxable. Claims are generally non-taxable unless they exceed the property’s adjusted basis.

The key takeaway here is that an insurance settlement does not automatically mean taxable income. It all comes down to the purpose of the payment.

Do Ohio laws affect settlement taxes?

Settlement taxation is primarily a federal tax law. Ohio generally follows federal tax treatment for settlements, meaning amounts taxable at the federal level (although certain state-specific adjustments may apply).

How settlement agreements can affect taxes

The settlement agreement serves as the primary reference for how damages are characterized.

The IRS looks at the purpose of each settlement payment – not just the total amount – so the details of the agreement matter. Even when a settlement appears straightforward, it might not be.

Settlement allocation refers to how the total settlement amount is divided among different types of damages. For example, this might include medical expenses, lost wages, emotional distress, or punitive damages. Each category can be taxed differently.

It’s important to properly distinguish non-taxable compensation (like physical injury damages) from potentially taxable amounts. Clearly identified damages tied to physical injury may support non-taxable treatment.

Settlement agreements are not just legal documents. They can shape the financial outcome of a case. If you’re wondering how personal injury or medical malpractice settlements will be taxed in Ohio, reach out to the attorneys at Crandall & Pera Law, LLC today.

Common questions about settlement taxes

Crandall & Pera Law, LLC is prepared to answer all your questions relating to settlement taxes in Ohio, including the following:

Is a car accident settlement taxable income?

Typically, no, as long as the car accident settlement is tied to the physical injury. However, if the car accident settlement income is tied to punitive damages or interest, it may be taxable.

Do you pay taxes on a lawsuit settlement?

It depends. Whether or not you have to pay taxes on a lawsuit settlement comes down to the types of damages and whether the compensation is for a physical or non-physical injury. An experienced Ohio attorney can help you understand the potential tax on settlements.

Are class action settlements taxable?

Depending on the claim type, class action settlements may be taxable. For example, consumer claims are usually taxable while injury claims are often not.

Are attorney fees from a settlement taxable?

Under federal law, plaintiffs may be taxed on the full settlement amount, including attorneys’ fees, although deductions may apply in certain types of cases, such as employment or civil rights claims. It depends on the type of claim and how the recovery is structured. In some cases, a plaintiff can be taxed the full amount, including attorneys’ fees. Reach out to Crandall & Pera Law, LLC, to discover whether attorneys’ fees will be taxable in your case.

Are compensatory damages taxable?

It depends on what the damages are for. Compensatory damages tied to physical injuries are generally non-taxable, while those related to non-physical harm may be taxable under federal law.

Why speaking with a lawyer before accepting a settlement matters

Before accepting a personal injury or medical malpractice settlement in Ohio, it’s important to understand how the compensation can impact your tax liability. An experienced attorney can help you identify which portions of your settlement may be taxable. They can also work with tax professionals to ensure compliance. Reach out today with questions. You don’t want to have unexpected tax burdens at filing time, misallocated damages that increase your taxes, or a lower overall recovery than you expected.

Speak with an Ohio personal injury lawyer about your settlement

If you’ve received a personal injury or medical malpractice settlement, Crandall & Pera Law, LLC can help you better understand how tax considerations may affect how much money you ultimately bring home. We work tirelessly to support clients’ financial recovery. Contact us today for a free consultation.