Is settlement money for a personal injury claim taxable?

Herb: No, personal injury settlements are not taxable.  When people come in for their settlement check, I always tell them keep a copy of your settlement sheet.  We always give the client a breakdown at the end of the case showing how much the insurance company paid, our fee, and medical expenses we paid on the client’s behalf from the proceeds.   I recommend that they keep this form with their tax records for the year of settlement in case the IRS ever audits them.  The IRS may ask where that deposit came from in your account. You show them this sheet, so they understand that it’s not some money that you earned gambling or on a side business.  It’s not taxable income.  So we do tell our clients to keep those sheets with their tax papers.