Impuestos en Indemnizaciones por Lesiones Personales en Nueva York

After suffering an injury caused by someone else’s negligence, receiving personal injury compensation can provide significant financial relief to cover medical expenses, lost wages, and other costs related to your recovery. However, many injury victims in Queens wonder: Are personal injury settlements taxable? This is a valid concern, as no one wants to face unexpected tax obligations after finally receiving their compensation.

The good news is that most personal injury settlements are not subject to federal income tax. However, there are important exceptions that you should understand before agreeing to any settlement. At The Tadchiev Law Firm, PC, our personal injury attorneys ensure that our clients in Queens know what to expect when they receive compensation.

Non-Taxable Damages in Personal Injury Compensation

When people ask, “Is personal injury compensation taxable?”, the answer is generally no, as long as the compensation relates to physical injuries or illnesses. According to Section 104(a)(2) of the U.S. Internal Revenue Code, damages received for physical injuries or illnesses are specifically excluded from taxable gross income.

This tax exclusion covers several types of compensation related to physical injuries, including the following:

Medical expenses

All compensation you receive for past, present, and future medical expenses related to your physical injury is tax-free. This includes hospital bills, surgeries, prescription medications, physical therapy, chiropractic care, medical equipment, and any other treatment necessary for your recovery, including projected future costs.

Lost wages

Compensation for lost income due to your physical injuries is generally not taxable when it is part of a personal injury settlement. This includes wages you were unable to earn while recovering from your injuries, as well as future loss of earning capacity if your injuries prevent you from returning to your previous occupation or working at the same level as before the accident. Although you would have paid taxes on these wages if you had earned them through normal employment, when they are paid as part of a personal injury settlement, they are not taxable.

Physical pain and suffering

Damages awarded for physical pain and suffering are not subject to tax. This includes compensation for the physical pain you experienced as a result of your injuries, ongoing discomfort during your recovery, and any chronic pain that may persist in the future. Because these damages compensate for physical injuries, they fall under the tax exemption.

Emotional distress related to physical injuries

If you developed emotional distress, anxiety, depression, or post-traumatic stress disorder as a direct result of your physical injuries, compensation for that emotional distress is also not taxable. The key is that the emotional distress must stem from the physical injury itself. For example, if you suffered fractures in a car accident and subsequently developed depression due to your physical limitations and pain, that compensation for emotional distress would not be taxable.

Taxable Damages in Personal Injury Compensation

Although most personal injury settlements are not subject to income tax, there are important exceptions where portions of your compensation may be subject to federal income tax. These include the following:

Punitive damages

Punitive damages are always taxable, even in a personal injury case. Unlike compensatory damages, which aim to reimburse you for actual losses, punitive damages are awarded to punish the defendant for particularly reckless, malicious, or intentional conduct. The IRS considers these damages taxable income, regardless of the type of case or the nature of your injuries.

Interest on the compensation

Any interest that accrues on your personal injury settlement is taxable as ordinary income. If your case takes months or years to resolve and interest accrues on the settlement or verdict amount from the date of the judgment until the time of payment, that portion corresponding to the interest must be reported as taxable income on your tax return. The principal amount of the settlement remains tax-exempt, but the interest does not receive the same exemption.

Emotional distress without underlying physical injury

If you receive compensation for emotional distress or mental suffering that does not stem from a physical injury or illness, that compensation is generally taxable. It is important to distinguish between emotional distress caused by physical injury (not taxable) and emotional distress without an underlying physical injury (taxable).

Previous medical deductions

If you deducted medical expenses related to your injury on prior years’ tax returns and then receive a settlement that reimburses those same expenses, you may owe taxes on that portion of the settlement up to the amount of your previous deduction. This is because you already received a tax benefit for those medical expenses, and the IRS does not allow double taxation.

State Taxes on Personal Injury Compensation in New York

Many of our clients in Queens specifically ask us, “Are personal injury settlements taxable in New York?” Fortunately, New York generally follows federal rules regarding the taxation of personal injury settlements, which means more good news for injury victims. If your settlement is not subject to federal income tax under Section 104(a)(2) of the Internal Revenue Code, it will also not be subject to state income tax in New York.

How a Personal Injury Attorney Can Help You Maximize Your Compensation

Understanding the tax implications of your compensation is only one part of maximizing your total recovery. An experienced personal injury attorney can help you in several important ways to ensure you receive the full compensation you deserve and retain as much of that compensation as possible.

For example, the way your personal injury settlement is drafted and structured can have significant tax implications. Attorneys experienced in these types of cases understand the importance of carefully structuring settlements to minimize tax liabilities. Your settlement agreement should clearly specify what portions of the compensation cover physical injuries, medical expenses, lost wages, pain and suffering, and whether it includes taxable components such as punitive damages.

This detailed specification helps determine what is taxable and what is not. If the settlement does not clearly specify how the funds should be allocated, the IRS may make its own determinations, which could result in unfavorable tax consequences.

During settlement negotiations, your attorney can work to structure the agreement in a way that favors the non-taxable components. For example, if both compensatory and punitive damages are being considered, your attorney can negotiate an increase in compensatory (non-taxable) damages while potentially accepting a lower amount in punitive (taxable) damages, resulting in a higher net recovery after taxes.

Contact our personal injury lawyers in Queens for help with your case

If you have been injured due to someone else’s negligence in Queens or anywhere else in New York City, don’t go through the legal process alone. The tax implications of personal injury claims are just one of the many complex aspects of these cases that require professional legal expertise.

Contact The Tadchiev Law Firm, PC today to schedule a free, no-obligation consultation with our experienced personal injury attorneys in Queens.

Sobre el autor

Simon Landsberg
Boris Tadchiev es socio fundador de The Tadchiev Law Firm, P.C. Su práctica se centra en la defensa de los derechos de personas y familias en casos de lesiones personales relacionados con accidentes automovilísticos, responsabilidad civil por daños a propiedades y homicidio culposo. También representa a profesionales de la salud en complejas demandas de arbitraje sin culpa.