Per the Internal Revenue Service (IRS), “the Service has consistently held that compensatory damages…received on account of a personal physical injury are excludable from gross income.” So what does this mean for you?
Most portions of a personal injury settlement are not taxable. However, there are certain exceptions.
Are Medical Bills Taxable?
Medical bills are typically not taxable. You don’t need to report this as income on your tax return. However, if you took an itemized deduction for any medical bills you paid in relation to this injury, you must include that as income “to the extent the deduction(s) provided a tax benefit.”
This can become complicated if you paid medical bills over several years. An accountant can help you understand if any part of your medical bill proceeds are taxable.
Are Lost Wages Taxable?
According to the IRS, lost wages are typically “excludable from gross income” (i.e., not taxable) as long as they are directly tied to your injury.
When a settlement or award is connected to a personal physical injury or physical sickness, the IRS allows you to exclude certain amounts from your taxable income.
The reasoning is straightforward: had you not been injured, you would have earned taxable wages. However, because those wages are being paid as part of damages for a physical injury or sickness, the IRS classifies them under the exclusion in Internal Revenue Code §104(a)(2), which removes such damages from gross income.
Are Emotional Distress Damages Taxable?
Emotional distress damages that are directly tied to a personal physical injury or illness are typically not taxable. An accountant can help you determine whether any part of your emotional distress settlement is taxable.
Are Punitive Damages Taxable?
Yes. Punitive damages are always taxable under federal law, regardless of whether they are connected to a physical injury or physical sickness.
Punitive damages are different from compensatory damages. Instead of reimbursing you for losses like medical bills, lost wages, or pain and suffering, punitive damages are designed to punish the wrongdoer and deter similar misconduct in the future. Because they are not tied to making you “whole” again, the IRS requires that punitive damages be included in your gross income.
If you receive punitive damages, they must be reported on your federal tax return as Additional Income and Adjustments to Income.
Is Interest Taxable?
Yes, interest is taxable. If you receive interest on your settlement, you must include this under Interest Income on your tax return.
Is Property Damage Taxable?
Property damage can be taxable in certain circumstances. If you receive a settlement for a “loss of value of property that [is] less than the adjusted basis of your property,” this is not taxable. If the settlement is for more than the adjusted basis, you must include any excess as income.
The long and short of it is that some parts of a personal injury settlement are taxable while others are not. This is one of the most common sources of confusion for people after a case. The good news is you don’t need to stress about the tax side of things. An experienced accountant can walk you through what applies in your situation, while the Aviles Law Firm PLLC team focuses on fighting for every dollar of compensation you deserve.
What Can I Recover in a Personal Injury Settlement?
When someone suffers harm due to another party’s negligence or wrongful conduct, the law allows recovery for a wide range of damages. These fall into economic damages (measurable financial losses) and non-economic damages (intangible harm). In some rare cases, punitive damages may also apply.
Medical Expenses
Compensation for past and future medical costs is often the largest component of a settlement. This includes hospital bills, surgeries, rehabilitation, prescriptions, physical therapy, medical equipment, and any ongoing care necessary due to the injury.
Lost Wages
If the injury caused time away from work, you can recover the value of your lost earnings.
Loss of Earning Capacity
Beyond immediate lost wages, if your injury limits your ability to pursue your career or reduces your long-term earning potential, damages may account for this diminished earning capacity.
Pain and Suffering
These damages cover the physical pain and discomfort caused by the injury, both short-term and ongoing. Since pain has no direct dollar value, courts or insurers often rely on formulas or multipliers based on the severity of the injury.
Emotional Distress
In addition to physical suffering, victims may be compensated for emotional and psychological harm, such as anxiety, depression, PTSD, or loss of enjoyment of life.
Loss of Consortium
Spouses or close family members may recover damages for the loss of companionship, affection, or intimacy resulting from the injury.
Property Damage
If the accident caused damage to personal property (e.g., a vehicle in a car crash), the cost of repair or replacement may be included.
Punitive Damages
In cases where the defendant’s conduct was especially reckless, malicious, or intentional, the court may award punitive damages. These are not meant to compensate the victim but to punish the wrongdoer and deter similar conduct.
Can I Still Recover a Settlement if I Was Partially At Fault?
Yes. In New York, you can still recover compensation for a personal injury even if you were partially at fault for the accident. This is because New York follows a legal rule called pure comparative negligence.
Under pure comparative negligence, the court (or insurance adjuster) assigns each party a percentage of fault for the accident. Your percentage of fault reduces your recoverable compensation, but you are never barred from recovery, even if you were more at fault than the other party.
Because fault directly impacts how much money you can recover, insurance companies often try to assign as much blame to the injured person as possible. Having strong evidence, such as police reports, witness testimony, photos, or expert analysis, is crucial to minimizing your share of fault and getting the settlement you deserve.
How Do I Get a Personal Injury Settlement?
To receive compensation in a personal injury case, you typically need to show that another party’s negligence caused your injury. Negligence means the other party failed to act with the level of care a reasonable person would have used under the same circumstances.
The Four Elements of Negligence
To establish negligence, you (or your attorney) must prove all four of the following:
Duty of Care
The defendant had a legal obligation to act reasonably to avoid harming others. For example, drivers have a duty to follow traffic laws and operate their vehicles safely.
Breach of Duty
The defendant failed to uphold that duty through action or inaction, e,g., driver runs a red light or a store owner ignores a spill on the floor.
Causation
The defendant’s breach of duty directly caused your injury. For example, a driver ran a red light and hit your car, causing you to suffer a brain injury.
Damages
You suffered actual losses as a result of the injury. Damages can include medical bills, lost wages, pain and suffering, or property damage.
Evidence That Can Help Prove Negligence
Building a strong case requires evidence to support each element. Examples include:
- Police or accident reports
- Medical records linking injuries to the incident
- Photos or videos of the scene and injuries
- Witness statements
- Expert testimony (e.g., accident reconstruction or medical experts)
Injury Settlements We Have Obtained for Clients
We know how to fight for—and win—every dollar our clients have lost. Some settlements and awards we have obtained include:
- $75 million for families who lost loved ones in an airline disaster
- $25 million for a woman hit by a leased truck
- $8 million for clients who suffered orthopedic and spinal injuries in a crash
Get Help With a Personal Injury Settlement Today
Understanding the tax rules surrounding personal injury settlements can be complicated. While certain damages, like medical expenses and lost wages tied to a physical injury, are often not taxable, others, such as punitive damages, need to be included in your income. An experienced accountant can guide you through the tax side of your settlement.
Aviles Law Firm PLLC is a New York City personal injury law office serving local clients. We focus on protecting your rights and fighting for the maximum compensation you deserve, every step of the way. We take these cases on a contingency fee basis, which means you pay us nothing upfront for our help. You only pay us if and when we win your case. We handle cases in English and Spanish.
