Will I pay taxes on my settlement?

Taxes are confusing when you just have normal income from employment, but when you have income that falls outside earned money, it can really make doing your taxes difficult. This is especially true if you win a personal injury lawsuit and receive a settlement. The money you receive could be income, or it could be exempt. It all depends on why the New Jersey court awarded the money to you. 

Forbes explains that money you receive as part of a personal injury settlement for physical injuries is exempt for tax purposes. You do not have to claim it as income or pay taxes on it. However, if you receive a portion of your settlement for emotional distress, then you may have to claim it as income pay taxes on that portion of the money. 

There are exceptions where emotional distress money may not be taxable, though. This is where it can get confusing. Any money you receive for physical injuries is exempt, but sometimes emotional injuries may be physical for tax purposes. For example, if emotional distress comes from a physical injury, you may not have to pay taxes on it. However, if your emotional distress causes physical symptoms, it remains taxable. 

Because these laws are rather vague and unclear, you may find yourself having to provide proof of your injuries to the IRS. You want to have medical evidence to back up claims and show an injury is physical and therefore exempt. It may also help to include something about taxes in the actual settlement agreement. This information is for education and is not legal advice.