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Are Accident Settlements Taxable?

wooden gavel with usa dollar on desk. close up.

Car accidents are expensive. You have to fix your car, cover your medical bills, pay for rentals, and deal with any other expenses that may crop up unexpectedly. If you were seriously hurt, you may have to field these costs while missing out on your paycheck. That’s why you bring a claim against at-fault drivers and insurance companies–they are legally responsible for covering all of these costs.

If you reach a settlement with an insurer or at-fault party, do the proceeds count as income? When you are just getting repaid for the damage someone else caused you, are you obligated to give the government a cut?

Continue reading for a discussion of taxation and car crash settlements. The following is a general overview only, and a recipient of an award should consult with their tax advisor as to their specific recovery. Call an experienced Kingston traffic accident lawyer for advice and representation after being hit by a negligent driver in New York’s Hudson Valley.

Different Parts of a Personal Injury Award May Be Taxed Differently

Personal injury settlements may comprise a few different types of damages. Part of the settlement compensates you for your out-of-pocket losses: Medical expenses, lost wages, loss of future earning capacity, etc. Part of the settlement may compensate you for non-economic harms that you suffered: pain and suffering, emotional distress, loss of life enjoyment, etc. Under certain circumstances, you might even be able to collect a sum intended to punish the defendant for their wrongdoing rather than to compensate you for your injuries. Different types of damages are taxed differently in New York.

Compensatory Damages for Injuries Are Not Taxable

As a general rule, damages intended to compensate you after an accident–repayment intended to “make you whole”–are not taxable by the IRS or under New York State law. The portion of your jury award or settlement attributable to compensatory damages should not be taxed. This includes compensation for:

  • Economic losses. You will not be taxed for damages covering your current medical costs, anticipated future medical expenses, property damage, lost income, or other out-of-pocket expenses.

  • Non-economic losses. You will not be taxed for compensation for your intangible losses, such as pain and suffering, emotional distress, loss of companionship, or loss of life enjoyment.

  • Physical and mental injuries. Whether your losses were caused by physical injuries, physical illness, or mental and emotional distress relating to physical injuries, your compensatory damages will not be taxed. Compensation for non-economic harm like emotional distress caused by a physical accident is not taxed, nor are associated necessary medical costs, such as counseling.

Note that you must report to the IRS if you received a settlement covering medical expenses that you deducted in prior years. You’ll need to account for those deductions now that your medical expenses have been repaid.

Additionally, the IRS distinguishes between emotional distress caused by a physical injury and a claim purely based on emotional distress. If you did not suffer physical injury but have a claim nonetheless, make sure to discuss the tax consequences with your attorney.

Punitive Damages Are Taxable

Punitive damages are available in cases where a defendant acted with malice or especially egregious negligence. Punitive damages are meant to punish the defendant and deter future defendants, rather than to compensate the plaintiff, although the plaintiff does collect those damages. If you were seriously injured by a drunk driver, for example, you might be able to collect punitive damages.

Unlike compensatory damages, punitive damage awards in a settlement or jury verdict may be treated as taxable income.

Trusted Legal Assistance for Your Hudson Valley Car Accident Claim

If you or someone you love has been hurt by a negligent or reckless driver in New York, find out if you’re entitled to money damages for your injuries by contacting the professional and thorough Hudson Valley car accident lawyers at Rusk, Wadlin, Heppner & Martuscello, LLP for a free consultation at 845-331-4100 (Kingston) or 845-236-4411 (Marlboro).

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