Are Lost Wages Taxable?

Are Lost Wages Taxable?            

Personal injury and accident cases often result in a judgment or settlement that awards damages to the Plaintiff based on physical, emotional, and economic suffering.  One of the factors considered part of the economic damages in a personal injury case is the value of the Plaintiff’s lost wages.  Lost wages are any pay that the plaintiff could not earn from his or her employer due to the injury or disability caused by the defendant.

Receiving compensation for wages lost because of an injury or auto accident is, of course, an ideal result in an injury case. However, once the case is settled, the Plaintiff needs to consider what comes next. This often leads to the question, what can the IRS claim from my award?

The IRS Internal Revenue Code states that all income is taxable from whatever source derived, unless exempted by another section of the Code.”  When it comes to income generated by a legal matter, there is an exemption for claims related to physical injuries, according to IRC Code section 104(a)(2).  All damages claimed in a personal injury case such as an auto accident are non-taxable. This includes income from lost wages, attorney’s fees, and other payments related to physical or emotional injury or illness.  As long as lost wages are part of a personal injury settlement or judgment, they are exempt from income tax.

If you have received lost wages due to an accident or injury, be sure to consult your attorney or accountant to discuss your taxes.