Generally, your personal injury settlement or award is non-taxable, and you do not have to report it on your tax return. The money you receive for your personal injury claim is meant to make you whole again or get you back as much as possible to where you were before the accident. Therefore, the money is not considered a gain that can be taxed.
There are a few exceptions where your personal injury settlement may be taxable. If you took itemized deductions for medical bills you incurred from treatment, then you will need to report the income on your tax return. Additionally, money recovered for lost wages or loss of earning capacity may be taxable, just as it is when you earn the wage under normal circumstances. Further, money attributable to emotional or mental distress may be taxable if the distress is not tied to any physical sickness and you incurred no medical bills to treat the distress. Lastly, punitive damages are taxable and must be reported.
You should always consult a Certified Public Accountant (CPA) or tax attorney when you are unsure whether your income from a personal injury settlement or award is taxable. Please also visit this link to an IRS guide for more information on this subject.