Here’s what you should know about the impacts of income from a personal injury case on other financial aspects of your life.
You’ve just settled your personal injury case and now you need to know, “Does personal injury compensation affect benefits?” You’re wondering, “Do I need to pay taxes on my settlement?” and “How much will I have to pay on the settlement money?” These are great questions, but the answers are not black and white. Here’s an overview of what you should know regarding how personal injury settlements can impact other income.
Quick answer:
- SSDI (Social Security Disability Insurance): Personal injury settlements do not affect SSDI benefits.
- SSI (Supplemental Security Income) / Medicaid: Settlements can reduce or terminate benefits because they count as income or assets.
- Medicare: Settlements generally do not affect eligibility or coverage.
- Unemployment: Settlements usually do not affect eligibility unless they include back pay.
Does personal injury compensation affect benefits?
Yes, a personal injury settlement can sometimes adversely affect eligibility for government benefits. For individuals already receiving SSI or SSDI, the relationship between your settlement and your ongoing benefits can be complex. A deeper understanding of how asset thresholds, structured settlements, and special needs trusts interact with federal disability rules can help prevent interruptions in payments and ensure compliance with Social Security Administration requirements.
Will a personal injury settlement affect Social Security?
If you receive social security based on age, a personal injury settlement will have no effect on your social security benefits.
Does a personal injury settlement affect Social Security Disability?
If you receive social security based on a disability, a personal injury settlement will not affect these benefits.
Will a personal injury settlement affect Medicare?
For Medicare, settlements that include compensation for future medical care often require the creation of a Medicare Set-Aside (MSA) account to ensure those funds are used for injury-related medical costs before Medicare begins paying.
Will a personal injury settlement affect Medicaid?
For Medicaid or SSI recipients, placing settlement funds into a special needs trust (SNT) can help protect eligibility by ensuring the money is used for approved expenses without being counted as a personal asset. Proper coordination with your attorney and the relevant agencies is essential to avoid unintended benefit disruptions.
Will a personal injury settlement affect Supplemental Security Income (“SSI”)?
A personal injury settlement can affect Supplemental Security Income (SSI) eligibility because SSI is a means-tested government benefit that imposes strict limits on income and resources. To qualify for SSI, an individual cannot have more than $2,000 in countable resources, and their income must fall below certain thresholds established by the Social Security Administration (SSA)
Personal injury settlements are generally considered countable resources and income for SSI purposes, which could disqualify an individual from receiving benefits. However, a Special Needs Trust (SNT) can be used to shield the settlement proceeds from being counted as resources, thereby preserving the beneficiary’s eligibility for SSI. A first-party SNT, funded with the beneficiary’s own assets (such as a personal injury settlement), can hold these assets without affecting SSI eligibility, provided the trust is properly drafted and administered in compliance with federal and state laws.
It is important to note that distributions from an SNT must be carefully managed to avoid reducing or eliminating SSI benefits. For example, direct distributions for shelter expenses, cash gifts, or commingling of SNT assets with the beneficiary’s personal assets can negatively impact eligibility (Practice notes, Understanding Special Needs Planning opens a new window)[1]. On the other hand, distributions for certain expenses, such as medical costs not covered by government benefits, education, or vacation travel, may not affect eligibility.
Reporting requirements
If you receive a personal injury settlement and you are on Supplemental Security Income (SSI) or Medicaid, you are required to report the settlement within 10 days of receiving it. The Social Security Administration (SSA) requires this notification because a settlement may affect your eligibility or payment amount for needs-based benefits like SSI.
When reporting, include:
- The total settlement amount
- The date received
- How the funds are held or spent (for example, whether placed in a special needs trust)
You should also notify your state Medicaid agency about the settlement, as states often have their own reporting timelines and procedures to ensure ongoing eligibility. Failing to report promptly can result in overpayments, penalties, or temporary loss of benefits.
Will a personal injury settlement affect BadgerCare?
Depending on the size of your personal injury settlement, your eligibility for BadgerCare could change. You may no longer be eligible for BadgerCare or could see a reduction in benefits.
Social Security Disability Insurance (SSDI) is an earned insurance benefit based on your work history and FICA contributions. Lump‑sum settlements do not count against SSDI because it is not means‑tested.
You can keep your benefits even when you receive a substantial personal injury settlement with one of the following approved methods:
- A first‑party special needs trust (42 U.S.C. §1396p(d)(4)(A)) can hold your settlement so it is not counted as a resource for SSI/Medicaid. The trust must be established for a disabled individual under age 65, funded with the individual’s own settlement, managed by a trustee, used for approved supplemental needs, and include Medicaid payback at death. The trustee controls the funds and makes disbursements directly for approved expenses (e.g., housing, medical, transportation). Cash given directly to the beneficiary may reduce SSI.
A structured settlement or annuity:
Payments can be spread out over a longer time, so the injured person remains under the income limits required to maintain benefits.- This involves spending the settlement funds for property or services that don’t affect eligibility. Good examples include paying off debt, buying a home, or making home improvements.
- ABLE accounts are specialized savings accounts that are not normally counted toward an asset limit. Wisconsin law does not currently allow the creation of ABLE accounts, but other states do allow out-of-state individuals to start these accounts in their states. Hopefully, Wisconsin will soon get on board with other states in allowing creation of these accounts.
Does a personal injury settlement affect Section 8?
Section 8 housing vouchers are awarded based on income. While your injury settlement may not disqualify you from this type of housing, interest earned on the settlement may push you over income limits. Those income limits change over time and are not the same for all locations. It is important to work with an expert to determine if interest earned on the settlement will push you over the limit.
Will a personal injury settlement affect child support?
Getting a settlement can affect the amount of child support and alimony—or spousal maintenance—you owe and the amount you get to take home. This is particularly true if your settlement is big or if you’re behind on your payments.
Will a personal injury settlement affect unemployment benefits?
In general, a settlement from a personal injury case is unlikely to affect your eligibility for unemployment benefits because unemployment is typically based on your employment status and earnings from work, not on compensation for physical injury. Payments for medical costs, pain and suffering, or other losses not tied to wages usually aren’t considered “income” that reduces unemployment benefits.
Important caveats:
- If the settlement includes a portion specifically designated as back wages or lost earnings from your employer, that portion can be treated like wages and may reduce or disqualify unemployment benefits.
- Unemployment eligibility also requires you to be able, available, and actively looking for work. If your injury prevents you from working, then unemployment may not apply and a different benefit program could be more appropriate.
- Because state unemployment rules vary, it’s best to check with your state’s unemployment office or a qualified attorney to understand how your settlement might be treated in your situation.
Are settlement funds taxable?
Generally, personal injury settlements are not subject to federal or state income taxes. But there are exceptions. These include punitive damages and some emotional or mental injuries. Interest on settlements and confidential settlements are also taxable.
Tax on Punitive Damages:
Punitive damages are taxable. Settlements do not normally divide different types of damages, such as pain and suffering, medical expenses, or punitive damages. If the settlement does involve punitive damage, an allocation of the various categories of damages can be made as a part of the settlement to make a smaller amount taxable.Tax on Emotional Injuries:
Damages for purely emotional or mental injuries are taxable when they are not the result of a physical injury. In personal injury cases where there is a physical injury, emotional or mental damages are not taxable.Tax on Settlement Payment Interest:
Interest on your personal injury settlement is taxable. In certain first-party claims, like uninsured motorist or underinsured motorist, interest may be a concern. If a jury verdict was obtained, interest begins on the amount collected from the day of the verdict forward. That interest is taxable.Tax on Confidential Settlements:
In some cases, parties may want to keep information secret. When your settlement is confidential, a portion of the settlement payment may be taxable. Murphy & Prachthauser generally advises clients to keep the settlement amounts confidential because scammers tend to appear when the public learns someone is getting a large amount of money.
If you receive a settlement that is partially or wholly taxable, it’s important to report the taxable part on your tax return. We recommend working with a tax professional to ensure you’re meeting your obligations and taking advantage of any exemptions that apply to you.
For Caregivers and Families: If you manage benefits on behalf of an injured adult, it’s essential to understand how settlements can affect ongoing assistance. A structured approach — often involving trusts or benefit planning — can help maintain eligibility while ensuring financial stability for your loved one. Our team regularly works with caregivers to simplify these processes and protect long-term care needs.
To be sure, ask the professionals
Need help protecting your benefits after a settlement? Our attorneys can guide you through special needs trust setup, benefits preservation, and disability planning to help you avoid interruptions in SSI, SSDI, or Medicaid eligibility.
Contact Murphy & Prachthauser today for a personalized consultation focused on your benefits and financial security.
FAQ
Will a personal injury settlement affect unemployment benefits?
Generally no. Unemployment eligibility is based on your ability/availability to work and prior earnings, not on personal injury compensation. However, if you’re unable to work due to injury, that may affect eligibility. Check state-specific rules.
Do I need to report my settlement to Social Security if I receive SSI?
Yes. You must report the settlement amount and timing to SSA, typically within 10 days of receipt. Failure to report can cause overpayments and penalties. Ask your attorney about using a special needs trust to preserve eligibility.
Does a personal injury settlement affect SSDI benefits?
No. SSDI is based on work history, not income or assets, so a PI settlement does not change SSDI or Medicare eligibility. You generally do not need to report the settlement for SSDI purposes.
How does a special needs trust help protect SSI/Medicaid after a settlement?
Placing settlement funds into a properly structured special needs trust means the assets aren’t counted for SSI/Medicaid eligibility. A trustee controls distributions for approved expenses, preserving benefits while allowing use of funds.
Can allocating part of my settlement to medical expenses change how it affects benefits?
Yes. Properly allocating portions for future medical costs (e.g., Medicare Set Aside) and documenting medical expense reimbursements can help protect Medicare interests and, with planning, reduce negative impacts on needs-based programs.