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Are Personal Injury Settlements Taxable?

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Taxable Person Injury Settlements

A personal injury lawsuit can be a long and exhausting process, but it is often essential in order to secure adequate compensation for one’s injuries. Nonetheless, when everything comes to an end, there is one more thing to consider: taxes. It is critical to understand that after receiving compensation, a portion of the settlement may or may not be taxable. For example, compensatory damages, as the name implies, are the sums of money paid to compensate for expenses incurred as a result of the accident. Compensatory damages are not typically taxable. Punitive damages, on the other hand, are frequently taxed. There are, of course, exceptions and some unique instances. It is always a good idea to consult your accountant and attorney if you have any questions concerning your settlement or taxes.

What Type of Settlements Are Not Taxable?

The majority of settlements that reimburse for medical expenditures incurred as a result of a physical injury (personal injury claim) are tax free. 

  • Motor vehicle accident settlements: This kind of settlement is among the most frequent types of non-taxable personal injury settlements. As a result, the amount of money received to pay for medical bills cannot be taxed by the State of New York or the IRS. Keep in mind that this only applies to bodily harm, not property damage. 
  • Slip and fall settlements: Personal injury settlements awarded in circumstances where someone slips and falls as a result of the property owner’s negligence are tax exempt.
  • Wrongful death settlements: This kind of settlement occurs when the deceased person’s relatives submit a lawsuit or claim. In most circumstances, relatives may be compensated for monetary support, medical expenditures, prospective income loss, and death benefits. Most of these damages are deemed compensatory, which means they are not taxable in most situations. 
  • Lost wages: Settlements that award reimbursement for lost wages are not taxable only if the loss of income is directly related to a physical injury or sickness.
  • Other non-taxable personal injury settlements include those obtained in medical malpractice lawsuits, dog attacks, construction or work injuries, and claims involving a defective part or product that caused harm to someone. 

What Kinds of Settlements Are Taxable?

If a portion of the settlement is awarded for a damage that is not considered a compensatory damage, it is subject to taxes. 

  • Punitive damages: Punitive damages are legal compensation that must be paid by the at-fault party in addition to compensatory damages for committing a crime or infraction. Punitive damages are not commonly awarded in court. Nonetheless, when someone obtains compensation for punitive damages, they must keep in mind that this portion of the settlement is not tax deductible. 
  • Pain and suffering: This kind of damage is difficult to categorize as taxable or non-taxable. As long as the injuries are evident, the amount of the settlement used to pay for medical expenses is normally non-taxable. However, because pain and suffering are subjective, the portion of the settlement that pays for pain and suffering is tax exempt in circumstances where the emotional anguish is directly caused by the injuries received during the occurrence. If the mental discomfort is caused by an external factor, any payment awarded for this damage is taxable. 
  • Interests: Settlements that accumulated  interest for any reason. The amount earned by the interest is taxable by both the IRS and New York State.

 Do I Have to Disclose a Personal Injury Settlement to the IRS?

When you file your tax return, you must include in your income the portion or portions of the settlement that are not tax exempt. For example, if you earned $100,000 from a personal injury case but only $80,000 is compensatory damages, you must declare the remaining $20,000 in income. If you deducted any out-of-pocket medical expenses from the previous year’s tax return and were later compensated as part of the settlement for these expenses the following year, you must declare this share as income.If you are unsure whether the amount received qualifies as compensatory damages or not, consult with an accountant and your lawyer.

How Are Personal Injury Settlements Paid Out?

Personal injury settlements are usually paid in two forms:

  •  Lump Sum:The plaintiff receives the whole amount of money awarded in this mode a few weeks after the settlement is achieved. Normally, the amount of money is deposited into an escrow account to clear the payments and guarantee that the payee has enough money. Following that, any pending lains, legal and attorney expenses will be deducted from the settlement amount. Finally, the law firm will give the plaintiff a check for the surplus money.
  • Structured Settlements: This type of settlement mandates the payee to pay the awarded sum in a predetermined number of installments over a set period of time. Payments may increase or decrease over time, or they may remain constant during the agreed-upon term. Similarly, the payment schedule might be agreed upon monthly, quarterly, or annually.

Regardless of the type of payment chosen for the settlement, the rules and regulations for taxable and non-taxable settlements remain the same. 

Free Consultation With a Personal Injury Lawyer

For most people, being in an accident and filing a personal injury claim can be a daunting process. In some circumstances, claimants will need to gather evidence to back up their claims, fill out a lot of paperwork, and deal with injuries that may need them to miss work. Finally, when a settlement is made, the majority of people will almost probably have to deal with a difficult tax return. Hiring a personal injury attorney can make things a lot easier. At Greenberg & Stein P.C. You will find some of the best personal injury attorneys in New York. From start to finish, our legal team will guide you through every step of a personal injury claim. Our skilled attorneys have represented many clients and assisted in the recovery of millions of dollars in compensation. Call us at 212-969-8755 to set up a free consultation with one of our attorneys to go through your case.