Settlements for personal physical injuries are not taxable. Section 104(a)(2), Internal Revenue Code. This means that a settlement for pain and suffering, most medical bills, and lost wages isn’t taxable.
This assumes that you did not take an itemized deduction for medical expenses related to the injury in prior years. (IRS Publication 4345).
Pain and suffering is typically paid in car accident claims, slip and falls and much more.
However, any money that a defendant pays for confidentiality is taxable. Amos v. Commissioner, T.C. Memo. Docket No. 13391-01, 2003-329.
Therefore, I don’t have my clients agree to confidentiality unless the company who is paying the settlement absolutely requires it. I’ll talk about this more in a bit.
Let’s look at the case that says that money paid for confidentiality is taxable.
In Amos, someone was injured when a basketball player kicked him. The injured person (Amos) agreed to a keep a $200,000 settlement confidential. However, the release didn’t say how much money was being paid as consideration to keep the settlement confidential.
The United States Tax Court ruled that $80,000 (40% of the whole settlement) was confidential. That’s big money!
If the release would’ve said that a certain amount was paid for confidentiality, the IRS may have only taxed that amount. But it didn’t state an amount for confidentiality.
Thus, the injured person had a big tax bill on his hands in that case.
Which companies will require confidentiality?
Typically, big brands are more likely to require confidentiality. Just look on the internet.
Try to find a settlement with Uber’s insurance company, Walt Disney World, Universal Studios or Walmart. Or look for a recent injury settlement with Publix Supermarket.
You’re going to have a tough time.
But why?
My educated guess is that they require confidentiality in their settlements.
Back in the day, Publix wouldn’t request confidentiality for personal injury settlements. I assume that they do now since I can’t find recent Publix settlements on the internet.
Some Companies Won’t Insist on Confidentiality (If You Press Them)
Some insurance companies will initially request confidentiality. However, they will back down if you ask them to remove it from the settlement release.
For example, I represented a man who broke his arm in a car accident in Sarasota, Florida.
A driver of the rental car that (my client was in) crashed into the back of another car.
The rental car driver purchased a Liability Insurance Supplement (LIS) when he rented the Hertz car. This gave him $2 million in liability coverage.
ESIS handled the injury claim. The injured young man’s mother hired me shortly after the accident. She hired me because ESIS was giving her the run around. They weren’t making an offer even though her son had a broken arm.
We settled with ESIS (Ace American Insurance Company) for $170,000.
But then I got ESIS’ settlement release. And you guessed it.
It has a confidentiality paragraph that said that my client couldn’t discuss the settlement.
So what did I do?
I crossed out this paragraph and sent it back to the ESIS adjuster. He said that my edit was fine.
Now, my client doesn’t have negative tax consequences. And he is free to talk about the settlement. He doesn’t have to live in secrecy.
Which companies don’t usually require confidential settlements?
Car insurance companies like GEICO, Progressive and State Farm don’t usually require confidentiality. The same with Allstate, Travelers, USAA and most others.
How do I know this?
Because I’ve settled over a hundred injury claims with those companies.
However, if an auto insurance company insures Uber, they may require confidentiality. Thus, expect Progressive (in Uber claims) to request confidentiality.
As you’ve seen, not agreeing to confidentiality is often important. But dealing with potential confidentiality is just one part of a settlement.
Find out other tips to writing a good settlement release that doesn’t make your settlement worthless.
This article is not tax advice. Always speak with a certified public accountant or tax lawyer.
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