Physical Injury Settlement Tax Calculator

What Is a Physical Injury Settlement?

A physical injury settlement compensates you for bodily harm caused by another party — such as car accident injuries, workplace accidents, medical malpractice, slip-and-fall injuries, or assault. Under the Internal Revenue Code, compensation received for 'personal physical injuries or physical sickness' is excluded from gross income, making it one of the most favorable categories of settlement from a tax perspective.

Tax Rules for Physical Injury Settlements

Under IRC §104(a)(2), damages received 'on account of personal physical injuries or physical sickness' are excluded from gross income — meaning they are tax-free at both federal and state levels. This exclusion applies even if the settlement is large. The key requirement is that the injury must be physical (i.e., observable bodily harm). Purely emotional injuries, without a physical manifestation, do not qualify for this exclusion.

How to Calculate Tax on a Physical Injury Settlement

If your settlement is solely for physical injury, enter the full amount in the 'Physical Injury' field and leave other fields at zero. The calculator will show $0 federal and state tax owed. If your settlement includes both physical and non-physical components, split the amounts across the appropriate categories. Medical expenses reimbursed by a settlement are also tax-free, provided you didn't previously deduct those medical expenses on your tax return.

Tax Reduction Strategies

• Ensure your settlement agreement clearly allocates amounts to physical injury to maximize the tax-free portion
• If you deducted medical expenses in prior years, the portion of the settlement representing those expenses may be taxable (tax benefit rule)
• Interest accrued on a physical injury settlement is taxable — even though the principal is tax-free
• Structured settlements can further reduce tax liability by spreading income over multiple years

Example Scenarios