Knowing which parts of your settlement are taxable can help you make sure you’re filing your taxes correctly.
Generally, personal injury settlements, including car insurance settlements, are not taxable in New York. Whether or not your settlement can be taxed depends on the kinds of damages you are awarded and the structure of the settlement negotiated for you by your car accident lawyers.
Knowing which parts of your settlement are taxable and which are exempt can help you make sure you’re filing your taxes correctly and avoiding costly mistakes. Be sure to discuss any tax implications of an injury settlement with your accountant.
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The 3 Types of Compensation for Damages and Injuries
There are three types of damages you can recover through a car accident case with the help of your personal injury lawyer. These include economic, non-economic, and punitive damages.
Economic Damages in Car Collision Cases
Economic damages are compensation for your financial losses caused by the crash. These damages are meant to compensate you for both your past and future injury-related expenses. Under personal injury law, some compensable economic damages include:
- Hospital bills
- Doctors’ bills
- Prescription medication costs
- Physical therapy and rehabilitation
- Psychological services
- Home health care
- Medical equipment costs
- Lost wages
- Lost earning potential
- Funeral and burial expenses if you lost a loved one
- Other out-of-pocket expenses related to your personal injury claim
Non-Economic Damages in Car Collision Cases
Non-economic damages are meant to compensate you for your non-financial losses. After a serious crash, you may be suffering from physical pain, anxiety, depression, and the stress and inconvenience that comes with being wrongfully injured.
You deserve compensation for your physical pain, mental suffering, and emotional anguish. If you can no longer go about your day-to-day life without pain, or if you can no longer participate in the hobbies and activities you once enjoyed, then you may be able to recover non-economic damages.
Is there a Cap for Non-Economic Damages?
New York does not place caps on non-economic damages, like pain and suffering damages. There is no limit to what you can request via a lawsuit. Talk to a lawyer to learn more about being compensated for non-economic damages after a car accident.
Punitive Damages in Car Collision Cases
Punitive damages are awarded in rare instances where the defendant acted with egregious negligence or malice. These damages are intended to “punish” the negligent party. Punitive damages can be awarded in addition to economic and non-economic damages, although they are not often included in a car accident settlement.
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Which Types of Damages Are Taxable?
The Internal Revenue Service (IRS) has summed up the taxability of personal injury recoveries in Publication 4345. Consult with your accountant to determine if there are any exceptions to these car accident settlement guidelines from the IRS in your case.
Are Economic Damages Taxable?
Car accident settlements received as a result of physical injuries or physical sickness are exempt from taxation. This includes any compensation awarded due to personal injuries sustained in a car accident, such as medical expenses, medical bills, or lost wages. However, if you previously deducted medical expenses you receive in a recovery from insurance coverage, you must report those expenses as income.
Are Non-Economic Damages Taxable?
The non-economic damages you get for emotional distress or mental anguish from a personal injury are treated the same as economic damages and are NOT taxable unless previously deducted.
Are Punitive Damages Taxable?
Yes. Punitive damages awarded as part of your settlement are taxable and are reported as “other income.” While punitive damages are subject to Federal tax laws, they are rare in car collision cases. Compensatory damages, like economic and non-economic damages previously mentioned, are much more common in a personal injury lawsuit for a motor vehicle accident.
When You Might Owe Taxes on a Settlement
There are certain scenarios where you may be required to pay taxes on a personal injury settlement. Discuss these exceptions with a tax professional to find out which IRS rules for an insurance company payout may be applicable to your personal injury settlement.
Previous Medical Expense Deductions
If you deducted medical expenses from your taxes in the past, and then receive a settlement for those same expenses, that portion of the settlement from your car accident claim will be taxed as income.
Interest Accrued
Additionally, if any interest is included in the settlement amount since it was filed or pending, car accident victims may have to report that as interest income.
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Consult a Tax Advisor
Whether you have received a settlement from an insurance company or won a lawsuit, it is important to consult with a tax advisor about any taxes that may be due. They will be able to guide you through the process of filing taxes on your awards and explain how it might affect your overall financial status.
Get Help from a Car Accident Lawyer
If you or a loved one has been injured in a car accident, contact the experienced Long Island car accident lawyers at Rosenberg & Gluck, L.L.P. for help understanding your legal rights and options for recovering fair compensation. Our experienced team of personal injury lawyers will evaluate your case and help you determine the best course of action for protecting your interests. We can negotiate for a full and fair settlement with the insurance company and take your case to court if necessary to recover lost wages, medical bills, pain and suffering, and more. Contact us today for a free consultation to discuss your car crash case.
