Are New York Auto Accident Settlements Taxable?

If you have been hurt in a car accident, you may have already reached out to a personal injury law firm to handle your case. You may even be anticipating getting a settlement to pay for the expenses associated with the crash. One thing you may not think about until April 15 is whether you will have to pay taxes on any settlement or verdict at trial.

Generally, you will not have to pay 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 the tax code to structure settlements in a way to benefit our clients. Reach out today to schedule a free initial consultation with a member of our legal team.

Types of Damages in Car Accident Claims

Before getting into which parts of a car accident settlement are taxable, it is important to understand the different types of damages in a personal injury claim. If you are hurt in a car 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.

By contrast, 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. 

Finally, punitive damages are only awarded in rare cases where a person acted intentionally or recklessly. Most personal injury cases involve negligence (carelessness), so punitive damages are not at issue. However, there are situations – such as drunk driving cases – where punitive damages may be awarded.

Which Parts of a Car Accident Settlement Are Taxable?

If you suffered a physical injury or illness as a result of a car accident, then any 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 wages, and medical expenses.

However, if you only suffered an emotional injury, then your settlement will be fully taxable. For example, if you were in a car crash and were traumatized but not hurt, then you will have to pay income 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 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 filed a lawsuit on February 1, 2020, and you get a verdict in your favor in 2022, then the defendant will be required to pay interest on the amount of the judgment from February 1 until you are paid. Any interest paid 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 IRS. 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.

How Our Law Firm Can Help

When you have been hurt in a car accident, the last thing that you want to worry about is the nuances of American tax law. Fortunately, most car accident settlements are not taxable. An experienced car accident lawyer can work with you to make sure that you keep as much as possible of your settlement.

Based in Melville, The Odierno Law Firm represents injury victims throughout Long Island. We offer free initial consultations, and never charge a fee unless we recover money for you. To learn more or to schedule a consultation with a Long Island personal injury attorney, give us a call at 631-752-8580 or fill out our online contact form.