The answer is often, “No.” However, you may have to pay taxes based on the circumstance and nature of your settlement or judgment.
In most cases, settlements and judgments are for only “compensatory damage” and “general damages,” which is compensation for medical bills, lost earnings, as well as the pain and suffering caused by the injuries. Most of that amount is typically not subject to taxes, since the settlement or judgment is meant to reimburse the plaintiff of his or her out-of-pocket losses. Furthermore, any award you receive for vehicle damage – as a result of a car accident – is not taxable.
However, any settlement or judgment amount you receive as compensation for lost wages may be subject to income tax. Since your original income would have been taxable had you not suffered the loss of earnings, so any compensation intended to replace that same lost wages should be also taxable. When it comes to punitive damages, they are almost always taxable.
Alas, it is imperative to understand that only your tax advisor can provide you with proper tax advice. Your personal injury attorney should be able to give you basic information on taxability of your settlement or judgement, but ultimately, seek out the advice of a tax professional.