It doesn’t matter if you’re a W2 employee or on a 1099, taxes are important and it’s critical that all income is accounted for and reported to the IRS. You don’t want to be charged with tax evasion, a federal crime. This brings us to the subject of personal injury settlements and the inevitable question that every plaintiff asks, “Do I have to pay taxes on my personal injury settlement?”
For starters, we say “personal injury settlement” because over 90 percent of personal injury claims settle out of court. However, what we’re going to explain also applies to jury verdicts obtained from trial as well.
As a general rule, personal injury settlements are not taxable. This means Uncle Sam does not get a share of most personal injury settlements or verdicts. In other words, plaintiffs are not legally required to pay taxes on their personal injury claims to the IRS or to New York State. There are very limited exceptions, which we’ll discuss below.
What Are the Exceptions?
There are four situations where a personal injury settlement or verdict is taxable; however, they do not apply to the majority of personal injury claims.
- If the injury arose out of a breach of contract case, it would be taxable. This specifically applies to breach of contract claims.
- Punitive damages are always taxable. If a personal injury lawyer helps his or her client obtain punitive damages, the attorney will ask the jury or judge to separate the compensatory damages from the punitive damages so only the punitive damages are subject to tax.
- Claims for emotional distress only without any physical injuries whatsoever are taxable. To avoid tax, the plaintiff would have to prove they suffered even the slightest degree of physical injury.
- Interest on personal injury judgements is taxable. For example, if you won at trial but the defendant appealed the verdict, interest would accrue until on the balance owed until you received payment.
Related: Will My Personal Injury Case Go to Trial?
We hope this post has answered your questions regarding personal injury settlements and verdicts and whether they are subject to tax. To file a claim in Saratoga Springs, contact DeLorenzo, Grasso & Dalmata, LLP today.