What Are the Tax Consequences of a Personal Injury Settlement and SSDI?

The money procured in a personal injury settlement will not be taxed so long as the damages derive from a physical injury or sickness. Social Security disability benefits (SSDI), however, can be subject to tax. Since most people with SSDI maintain the program as their primary source of income, the majority of people do not get taxed for it. A person will only be taxed on his or her SSDI if he or she is making an income above $25,000.

When Is A Personal Injury Settlement Taxed?

Instead of going through a costly and lengthy court case, some litigants prefer to end with a settlement. A settlement is an agreement between two parties that results in a voluntary dismissal of a lawsuit. It is a way for both groups to reach a solution without needing a judge’s decree.

As with most questions pertaining to the law, whether a settlement in a personal injury case is taxable is determined by several factors. A general rule determined by the Internal Revenue Service (IRS) is that a settlement cannot be taxed if the damages were for physical pain or sickness. If a person sues a plumber for a falling pipe that caused an injury, the costs for the damages associated with the hospital visit and recovery would not be taxed.

There are entirely different statutes for emotional damages, which the IRS has decided are taxable. However, there are exceptions to this rule. If the emotional damages were directly related to the injury, then they would be tax-exempt. If a victim is not injured, but still needs to file a suit for emotional damages, he or she will be taxed on the settlement.

In the example with the plumber above, if the pipe did not strike the victim but instead fell several feet away, but the fall was emotionally jarring to the man, he may file a suit. In the personal injury case for the costs associated with the mental anguish he suffered, the settlement would be taxable.

Are SSDI Benefits Tax-Exempt?

SSDI benefits can be subject to taxes, but most people do not pay taxes on them because they have no other forms of income. The degree to which someone pays taxes on SSDI is determined by how much he or she earns per year.

People using SSDI who make $25,000 or less pay 0% on taxes. People who make between $25,000 and $34,000 pay 50%, and people who make over $25,000 pay 85%.

This configuration is altered for married couples. Since couples tend to file their taxes together, the income amounted needed to require them to pay taxes is higher. Only couples who make over $32,000 pay taxes on SSDI. They would have to make more than $44,000 to pay over 85.

Understanding the exceptions and statutes that determine whether a person pays taxes on a personal injury settlement or SSDI benefits can be tricky. It is easiest to remember that damages caused by physical pain are tax-exempt, and single people are only taxed for SSDI if he or she makes more than $25,000.