Since tax season just came to an end, taxes are still on a lot of people’s
minds. If you are about to file a personal injury claim, at some point
you’ll wonder, “Am I supposed to pay taxes on my
personal injury settlement?” This is a valid question and it’s something that
all plaintiffs need to put their attention on.
For starters, we’re saying “personal injury settlement”
as opposed to “jury verdict” because the vast majority of
personal injury claims settle out of court. However, even if your case
were to go to trial and result in a favorable jury award, the advice would
be the same in regards to your tax obligation.
Physical Injury Compensation is Not Taxable
We have good news – personal injury settlements and verdicts are
not generally taxable under state or federal tax laws. So, whether a case
settles in or out of court, it’s not typically subject to state
or federal taxes. Meaning, neither the IRS or the State of New York are
in the practice of taxing the proceeds from personal injury settlements
“Are there any exceptions to this rule?” Yes, there are exceptions
but they apply to very few personal injury cases. First, if a
breach of contract caused your physical injury or illness, you would be taxed on the damages
if they stemmed from a breach of contract lawsuit.
The second exception includes
punitive damages because these are taxable. If a claim includes punitive damages, the plaintiff’s
personal injury lawyer will ask the judge or jury to separate the verdict
into punitive and compensatory damages; this way the compensatory damages
are not taxed by the IRS.
The third and final exception is claims for emotional injuries only, such
as those arising from employment discrimination or something else that
caused emotional distress, but no physical injury. If you filed a claim
for emotional injury only, it would be taxable unless you can prove that
you suffered even the slightest degree of physical injury.
Why Most Personal Injury Claims Settle Out of Court
Looking for a Long Island personal injury attorney?
Contact us to set up a consultation.