If you’ve received a personal injury settlement in South Carolina, you might be wondering whether you’ll need to pay taxes on it. It’s a common concern, and the answer depends on what the settlement covers.
In this blog, we’ll explain how taxes apply to personal injury settlements, what portions are typically exempt, and when you might owe taxes, so you can plan your next steps with clarity and confidence.
What Parts of a Personal Injury Settlement Are Tax-Free?
Most personal injury settlements are not taxable under both federal and South Carolina tax laws if they are meant to compensate you for physical injuries or physical sickness.
For example, if your settlement covers:
- Medical expenses (past and future)
- Pain and suffering due to physical injury
- Lost wages directly related to your injury
- Emotional distress directly caused by a physical injury
Then you generally won’t owe any taxes on that amount.
According to the Internal Revenue Service (IRS), compensation for personal physical injuries is excluded from gross income under Section 104(a)(2) of the Internal Revenue Code.
When Might You Owe Taxes on a Settlement?
While most of your settlement may be tax-free, there are some exceptions. You might owe taxes if:
- You received punitive damages. These are designed to punish the defendant and are almost always taxable.
- The settlement includes interest on the amount awarded. That interest is typically taxed as income.
- You deducted medical expenses in a previous year and later received a settlement that reimbursed those expenses. In that case, you may need to pay taxes under the IRS’s tax benefit rule.
- Emotional distress not related to physical injuries is generally taxable.
Example: If your claim was based on slander, discrimination, or workplace harassment without physical injury, those settlements are often subject to income tax.
What About Structured Settlements?
If you’ve agreed to receive your settlement as periodic payments over time, taxes are still determined based on the nature of the settlement. Structured settlements for physical injuries typically remain tax-free, as long as the terms were set correctly through the original settlement agreement.
What About South Carolina State Taxes?
South Carolina generally follows federal rules when it comes to the taxation of personal injury settlements. That means if the IRS considers the compensation non-taxable, South Carolina likely will too.
Still, if your settlement includes punitive damages or interest, you should plan for both federal and state income tax liability.
Should You Report a Tax-Free Settlement?
Even if your settlement isn’t taxable, the IRS still recommends keeping detailed records of the agreement and how the payment was categorized. If the insurance company or defendant issues you a Form 1099, it could trigger questions. A personal injury lawyer can help ensure you handle the paperwork correctly and avoid unnecessary audits.
Local Data: South Carolina Settlement Trends
In South Carolina, the average payout for personal injury settlements varies widely depending on the severity of injuries and the type of claim. According to the South Carolina Department of Public Safety, more than 147,000 traffic collisions occurred in 2022 alone, many of which resulted in personal injury claims.
While each case is unique, it’s common for settlements to range from $15,000 to $100,000 for moderate injuries. In more severe cases, especially those involving long-term disability or wrongful death, the compensation can reach into the millions.
Talk to a Personal Injury Lawyer Before You Accept a Settlement
Even if the amount seems fair, you should always consult a lawyer before signing a release or accepting payment. An attorney can help you understand:
- Whether the amount is truly fair for your injuries and damages
- What the long-term consequences could be
- How to minimize or avoid tax liability
At Spartan Law, we handle personal injury claims across South Carolina and guide clients through every stage, from filing a claim to understanding the tax implications of their settlement.
Call Spartan Law Today
If you’re unsure whether your settlement is taxable, or if you haven’t reached a settlement yet and want to protect your interests, we’re here to help.
Call Spartan Law at 864-777-1000 for a free, no-pressure consultation with a personal injury lawyer. We’ll review your situation, explain what to expect, and help you move forward with confidence.
