Are Car Accident Settlements Taxable in New York?
If you are injured in a car accident, the odds are good you are facing some financial strain. Medical bills from a serious injury can quickly become overwhelming. If you are too hurt to return to work, your finances could face additional strain. A negotiated settlement with the at-fault driver or their insurance company could go a long way to ease this financial strain. However, it is vital that you consider the complete financial picture before agreeing to a settlement amount. For example, your settlement could be subject to taxation in some cases.
Most of the time, your personal injury claim will not be taxable by the state or federal government. That said, certain forms of compensation may be taxable depending on the circumstances. Whether or not portions of your potential injury claim could be taxed is one question our New York City car accident lawyers can help with.
Damages that are not taxable
It is important to note that most compensable damages are not taxable under state or federal law. Compensable damages are monetary awards intended to compensate you for your losses. These include out of pocket expenses like medical bills or subjective losses like pain and suffering.
Compensation for your medical bills is never taxable. After all, these benefits are intended to make you whole after a loss. If the government takes a share, you are left unable to pay for the entirety of your medical bills. The same is true for compensation for lost wages after an accident. In order to ensure you are made whole, the government will not tax damages intended to compensate you for your missed paychecks.
Things are less clear when it comes to emotional distress and mental anguish damages. The determining factor is the cause of this distress. If emotional distress or mental anguish compensation stems from your car accident injury, they are not taxable. However, emotional distress claims stemming from breached contracts or non-injury claims may be taxed by the state or federal government. Even then, there are exceptions to this exemption related to out of pocket costs like therapy bills.
While compensable damages are generally not taxable, they are not the only form of compensation available in a personal injury claim. In some cases, punitive damages are also available. Punitive damages are not intended to compensate you for your losses. Instead, these damages exist to punish a defendant for egregious conduct.
Because these damages do not compensate you for your losses, they are taxable in the State of New York. While it is important to understand this, the reality is that punitive damages are fairly uncommon in personal injury claims. Because of the differences in taxation between these types of compensation, it is important that jury awards clearly differentiate between the two. The same is true for negotiated settlements. A personal injury lawyer can help ensure your settlement is structured in a way that will benefit you in regards to your tax debt.
There is one more important exception where you could be on the hook for a tax bill after a settlement or trial judgment. In many cases where a plaintiff prevails at trial on a personal injury claim, the court will award interest on the amount of the judgment. If the defendant does not pay immediately, interest will begin to accrue. Over time, the interest on a judgment could become substantial. This interest, if eventually paid, is taxable under state law. This is true even for interest on awards for compensable damages.
Speak with Douglas & London about your settlement
Maximizing your compensation following a car accident is crucial. This process starts with ensuring that you account for any potential taxes on your settlement. What’s more, by carefully structuring your damage award you could avoid unnecessary tax bills. To learn more about how taxes could impact your injury claim, schedule a free consultation with the New York City personal injury lawyers at Douglas & London right away.