Posted in Personal Injury on May 20, 2026
Personal injury settlements are not considered income in California, though this depends on the type of compensation received. Victims of a Long Beach personal injury case can claim economic losses, or costs related to the accident at their full value, and not pay any taxes on those recoveries. The money the victim of a personal injury case receives is yours to keep, though you must pay any outstanding liens on those funds. There are several limitations and exceptions to this.
Compensatory Damages Are Typically Not Taxed
Most of the funds victims receive in a personal injury claim are compensatory damages. This type of damage is not typically taxable under state or federal law. There are two specific types of compensatory damages in California:
- Special damages: These are any of the economic losses you have. These are losses such as medical expenses, lost time at work, and property damage claims.
- General damages: These include intangible, or non-economic, losses. They cover losses such as pain and suffering, loss of quality of life, emotional trauma, and loss of consortium.
The law does not allow these damages to be taxed as income. They are paid to you because someone else was negligent and caused you to have these losses.
Note that you may have to pay taxes on wages as you would if you obtained those wages through traditional paychecks.
Punitive Damages May Be Taxed
Punitive damages are a type of award of funds not meant to compensate you. Rather, they are a type of punishment levied against the person at fault. Though rare, these damages may be applicable in situations where you experienced a particularly heinous or intentional act.
Punitive damages are taxable under California law. They are considered a form of income you receive. You pay taxes on them the same as you would on any other income you receive.
Interested Earned on a Reward
In some situations, the money owed to you in a settlement is placed into a high-yield savings account, investment account, or other interest-bearing account. In these situations, the interest earned on these accounts is paid to you. The interest is a form of income. You will pay income taxes on that award the same as you would any other income you receive.
Awards Exceeding Value
Sometimes you may receive an award for compensatory damages that is more than what your losses are. For example, if you are in a car accident and receive an award of $60,000 for the loss of your vehicle, but the vehicle was only valued at $20,000 prior to the accident, the remaining $40,000 is taxable income.
Federal Taxes in a Personal Injury Claim Settlement
The Internal Revenue Service does not tax your settlement award. If the award is provided to you as a jury verdict, it will not face taxation. You do not need to report these losses, including for personal injuries.
Speak to an Attorney and an Accountant to Clarify What Applies in Your Case
It is always wise to speak to a personal injury attorney after these incidents to make sure you are seeking full compensation and that you understand the tax implications you face. Your accountant can help you make the best decisions for reporting and paying taxes based on your specific financial situation and the type of award you receive. Contact us.