Are New York Personal Injury Settlements Taxable?

If you have been hurt in an accident, you may be anticipating a settlement to cover medical bills, lost income, and other expenses. For example, if you were in a car crash, a car accident settlement could help cover these costs. One thing many people overlook is whether any portion of a settlement could be taxable.

So, are personal injury settlements taxable in New York? Generally, no. You will not have to pay New York state taxes or federal income taxes on the money that you receive for your injuries, as long as some type of physical injury was part of your claim. However, if you are awarded punitive damages or have a claim for emotional damages only, you will have to pay taxes. In addition, if you receive interest on a judgment, you will have to pay taxes on that amount.

At The Odierno Law Firm, we have more than 150 years of combined experience representing accident victims in Nassau and Suffolk counties. We use our knowledge of New York personal injury law and tax laws to structure settlements in a way that benefits our clients. Reach out today to schedule a free initial consultation with a member of our legal team.

Types of Damages in Personal Injury Claims

Before getting into the tax implications of personal injury settlements, it is important to understand the different types of damages in a personal injury claim. If you are hurt in an accident, you may be entitled to three types of damages: economic, non-economic, and punitive.

Economic and non-economic damages are compensatory, which means that they compensate an injury victim for their losses. Punitive damages do not compensate you for your injuries. Instead, they are designed to penalize a wrongdoer.

• Economic damages: Cover direct financial losses, such as property damage, medical bills, future medical treatment, lost wages, and reduced earning capacity. They are usually proven with things like medical bills, invoices, and pay stubs.
• Non-economic damages: Compensate an accident victim for intangible losses. Examples of non-economic damages include pain and suffering, emotional distress, loss of enjoyment of life, and scarring or disfigurement. These may be proven through testimony from family members, friends, or mental health professionals.
• Punitive damages: Only awarded in rare cases where a person acted intentionally or recklessly. Most personal injury cases involve another person’s negligence (carelessness), so punitive damages are not at issue. However, there are situations – such as drunk driving cases – where punitive damages may be awarded.

What Are the Taxable Portions of Personal Injury Settlements in New York?

If you suffered a physical injury or illness as a result of an accident, then any settlement amount that you received in compensatory damages is not taxable by the federal or state governments. This includes both economic and non-economic damages, such as pain and suffering, lost income, and medical expenses.

However, if you only suffered emotional distress, then your settlement will be considered taxable income. For example, if you were in a car crash and were traumatized but not hurt, then you will have to pay taxes on the settlement. If you suffered even a slight physical injury – such as a scrape or bruise – then your settlement will not be taxable, even if the main part of your claim is for emotional injury.

Punitive damages taxable are always taxable. If you receive both punitive and compensatory damages, you will only pay taxes on the punitive damages portion of the judgment.

Finally, if your case goes to trial and you win, then the court will likely require the defendant to pay interest on the judgment for the length of time that the case has been pending. For example, if you received a verdict in your favor two years after you initially filed your personal injury lawsuit, then the defendant will be required to pay interest on the amount of the judgment from the date you filed until you are paid. Any interest earned on the judgment is taxable.

These rules mean that it is incredibly important to have your settlement structured in a way that minimizes the amount of taxes that you will have to pay. After all, the settlement is meant to compensate you for your losses – you don’t want a big chunk of it to go to the Internal Revenue Service. A skilled Long Island personal injury lawyer can work with you to make sure that as much of your settlement as possible is non-taxable.

Need Help After an Accident? Schedule a Free Consultation With The Odierno Law Firm

When you have been hurt in an accident, the last thing that you want to worry about is your income tax obligations. Fortunately, most personal injury settlements are tax-free. An experienced personal injury lawyer can work with you to make sure that you keep as much of your settlement, whether it’s a slip-and-fall claim or an auto accident settlement, as possible.

Based in Melville, The Odierno Law Firm represents injury victims throughout Long Island. We offer free initial consultations and never charge any legal fees unless we recover financial compensation for you. To learn more about how our personal injury attorneys can handle the legal process for you, give us a call at 631-752-8580 or fill out our online contact form.

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