Do You Have to Pay Taxes on a Personal Injury Settlement in New York?

Whether or not you must pay taxes on a personal injury settlement in New York depends on the type of compensation you receive. If you suffered a physical injury, you are not taxed. Damages for an emotional injury– unrelated to a physical one will trigger New York taxes. Since the laws regarding federal taxes on personal injury settlements are virtually identical, you will likely owe taxes to the U.S. Treasury as well.

A New York City personal injury lawyer at Douglas and London will protect your rights and help you receive the maximum compensation you deserve for your injuries. Our seasoned attorneys have recovered more than $18 billion for clients in settlements and verdicts.

Typical Compensation

While every personal injury case is different, the settlements all have some elements in common. They should include payment of medical expenses, lost wages, and lost future income. Calculating these economic losses is relatively straightforward. As noted above, when a case concerns a physical injury, this type of compensation is not taxable.

Pain and Suffering

Unlike lost wages or medical bills, determining pain and suffering is much more subjective. If the pain and suffering, or emotional distress, results from a physical injury, the settlement award is not subject to taxation.

However, if the emotional distress occurred due to the plaintiff’s behavior and did not involve a physical injury, the award is taxable. In addition, the IRS has decided that certain physical conditions accompanying emotional distress do not qualify as injuries, including stomach aches and headaches. Such symptoms are considered “normal byproducts” of emotional distress.

Punitive Damages

Punitive damages are not awarded in a settlement, and they are rarely awarded in a trial. Punitive, which means “punish,” is intended to make an example out of the defendant if they behaved in a truly egregious and reckless manner.

A plaintiff receiving punitive damages should expect to pay taxes on them. By their nature, they are always more than the plaintiff’s monetary losses. These damages do not relate to actual expenses, and therefore are taxable.

Judgment Interest

It is not uncommon for the plaintiff to receive their award after interest has accumulated. It dates from the time the injury occurred until the person collects their judgment. The interest on it is subject to New York and federal tax.

These days, bank interest rates are at historic lows. That is not the case with New York judgments, which by law are calculated at 9 percent annually. That is a good return on investment– and when it involves interest paid on a substantial judgment, the tax burden can be quite high.  

Structuring the Settlement

The purpose of a settlement is to compensate you for your damages. Unless a settlement is structured correctly, it is possible that the amount owed in taxes can take a significant portion of your compensation.

Your attorney should determine what part of your settlement is and is not taxable, on state and federal levels. We can work with your accountant or recommend an accountant for tax-planning issues. It may be possible to structure the settlement so that your tax obligations are kept to a minimum. In other words, a structured settlement is designed to ease potential tax headaches with the IRS.

Schedule a Free Consultation With Us at Douglas and London

If you or a loved one were seriously injured due to another party’s recklessness or negligence, contact an experienced personal injury lawyer at Douglas and London. Schedule a free consultation by calling or texting 24/7. You can also fill out our online form. After evaluating your claim, we will discuss your options.

While most cases are settled, our dedicated attorneys will take your claim to court when necessary. There is never a fee unless you receive compensation, as we work on a contingency basis. Hablamos Español.