Are Personal Injury Settlements Taxable in Washington State?

If you get a personal injury settlement, it’s normal to wonder, “Do I have to pay taxes on this?” The answer is usually no, but it depends on what the money is for. In Washington, most of the tax rules that matter come from federal law, not state law.

Do I pay federal income tax on a personal injury settlement?

Often no, if the money is for physical injuries or physical sickness. The main federal rule is 26 U.S.C. § 104(a)(2) which states that the money paid due to physical injuries is not counted as taxable income.

Do I pay Washington state income tax on a settlement?

Usually no, because Washington does not have a state personal income tax.

Some people hear about Washington’s capital gains excise tax (Chapter 82.87 RCW) and worry that it applies to settlements. Capital gains tax is usually a tax on profit from selling something you own, like stocks or a house, for more than you paid. A personal injury settlement usually is not money from selling something, so it normally is not treated as “capital gains” the way investments are. Therefore, this tax usually is not the issue in injury cases.

Which parts of a settlement are usually not taxable?

In many injury cases, these parts are usually not taxable when they are tied to physical injury:

• Money for medical treatment
• Money for pain and suffering from the physical injury
• Money for other harm caused by the physical injury

What parts are often taxable?

Even in an injury case, some parts can be taxable. The most common are:

• Punitive damages These are meant to punish the wrongdoer, not pay you back for your injury. Under federal tax rules, punitive damages are usually taxable. Punitive damages are rare under Washington law.
• Interest If interest gets added to a settlement or court judgment, that interest is usually taxable.
• Emotional distress without a physical injury If the claim is mainly for emotional distress and not connected to a physical injury, it is more likely to be taxable under federal rules.

What if I deducted medical bills on my taxes before the settlement?

This is a big one people miss. If you deducted medical expenses on your taxes in a past year, and then your settlement later pays you back for those same medical bills, that repaid part can become taxable. This comes from the federal rules in 26 U.S.C. § 104.

If it’s one lump sum, how does anyone know what’s taxable?

The IRS looks at what the money was meant to cover. That’s why the details can matter, like what the claim was about and how the settlement is described. A settlement can be one check, but still cover different categories.

Will I get a tax form like a 1099?

Sometimes. Getting a tax form does not automatically mean the whole settlement is taxable, but it is a sign you should handle it carefully when you file your taxes.

What laws are most important for this question?

These are the main ones that people refer to:

• Washington: Washington does not have a state personal income tax.
• Washington: Capital gains excise tax law, Chapter 82.87 RCW (usually not a personal injury settlement issue)
• Federal: 26 U.S.C. § 104(a)(2) (the main rule for physical injury settlements)

Bottom line

Most personal injury settlements for physical injuries are usually not taxable, especially in Washington since there is no state income tax. But parts like punitive damages, interest, and some non-physical claims can be taxable, and prior medical deductions can create a surprise. For more details about your specific settlement case, refer to the IRS page about settlement taxability here.