What Costs Will Be Deducted from Your Personal Injury Settlement?

December 15, 2023

When you hire a personal injury law firm to represent you, the firm will typically provide legal representation at no out-of-pocket cost. Nearly all personal injury law firms represent their clients on a contingency-fee basis, which means that their clients only pay if they win.

So, what if you win? If you receive just compensation for your injuries, what costs will be deducted from your personal injury settlement?

In most cases, successful personal injury claimants will have two main categories of costs deducted from their personal injury settlements. But there is a third possible category as well, and it is important to make sure that you account for any taxes you owe. While personal injury settlements are often tax-free, there are exceptions, and you do not want to inadvertently underpay the Internal Revenue Service (IRS) or Pennsylvania Department of Revenue (DOR).

The Two Main Categories of Costs Deducted from a Personal Injury Settlement

We’ll talk about the two main categories of costs first. If you receive a personal injury settlement, the funds will be placed into your law firm’s escrow account, and your law firm will deduct the following costs from your settlement before disbursing the remainder to you:

1. The Costs of Pursuing Your Personal Injury Claim

While you do not have to pay anything out-of-pocket when you hire a personal injury law firm to represent you, there are costs involved in pursuing your claim. Your law firm will cover these costs while your claim is pending, and if your claim is successful, your law firm will recoup these costs from your settlement. Some common examples of these costs include:

  • Filing fees
  • Printing and mailing costs
  • Investigators’ fees
  • Expert witness fees
  • Court reporter fees

What if your claim isn’t successful? If your claim is unsuccessful for any reason, you will owe nothing. This is a risk that your law firm takes when it commits to representing you.

2. Attorneys’ Fees

If you receive a personal injury settlement, your attorneys’ fees will also be deducted from the amount of your recovery. Your attorneys’ fees will typically be calculated as a percentage of the amount your law firm helps you recover. Law firms can charge different percentages, and while differences will account for lawyers’ experience (or lack thereof) in some cases, most personal injury law firms charge attorneys’ fees within a fairly limited range.

Here, too, if your claim isn’t successful, you owe nothing. This is the nature of contingency-fee representation. Your law firm’s right to receive compensation for its services is contingent upon your financial recovery.

A Possible Third Category: Unpaid Medical Bills

In some cases, unpaid medical bills can also be deducted from an accident victim’s settlement. This could be the case, for example, if your law firm provides a “letter of protection” to your medical providers. A letter of protection guarantees that your providers will receive payment out of your settlement if your case is successful. Oftentimes, this will give them the confidence they need to continue providing treatment without sending your medical bills to collections.

The Tax Implications of Receiving a Personal Injury Settlement in Pennsylvania

Now, what about taxes? In most cases, personal injury settlements are not taxable at the state or federal level. For example, Section 104(a)(2) of the Internal Revenue Code (IRC) provides:

“Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include . . . the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.”

While personal injury settlements aren’t taxable in most cases, there are exceptions. Additionally, depending on how your settlement is structured, it is possible that some of the financial compensation you receive could be subject to state or federal income taxation (or both).

For example, as noted in Section 104(a)(2) of the IRC, punitive damages are taxable in most cases. So, if your settlement (or verdict) includes an amount attributed to punitive damages, this amount may be taxable. Additionally, if you deducted your medical expenses in a prior tax year and are now receiving reimbursement for the bills you paid, you may need to factor this into your tax returns as well.

These are just two examples, and if you receive a settlement, you will most likely want to work with an accountant or tax lawyer to make sure you are paying the full amount you owe (if any).

Is It Worth Hiring a Personal Injury Law Firm?

With all of this in mind, is it worth hiring a personal injury law firm? Is it worth pursuing a personal injury claim at all? Or should you simply accept the consequences of someone else’s mistake?

While there are no guarantees, hiring a personal injury law firm is well worth it in most circumstances. Since your law firm will need to incur costs on your behalf and essentially work for free while your case is pending, it will only take your case if you have a reasonable chance of success. A personal injury law firm won’t waste your time—or its own. Even taking your legal costs and attorneys’ fees into account, if you obtain a settlement with the help of a personal injury law firm, you are still likely to take home far more than you could reasonably expect to obtain from the insurance companies on your own.

Contact Us for a Free, No-Obligation Consultation About Your Personal Injury Claim

Our law firm represents accident victims and families in personal injury claims throughout Pennsylvania. If you have questions about asserting your legal rights, we invite you to get in touch. To schedule a free, no-obligation consultation at Drake, Hileman & Davis, PC, please call 888-777-7098 or tell us how we can reach you online today.