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How Will My Personal Injury Settlement Be Taxed?

When you’re injured due to someone else’s negligence, one of the most important things for you is to get the compensation you deserve in order to afford the costs of your medical treatment, as well as to cover any other expenses or lost income. Nearly all personal injury cases are settled before or during a trial, and only a small number ever make it all the way to a verdict.

Once you’ve received an acceptable settlement offer from the defense attorney and you’ve informed your lawyer that you accept, your lawyer will inform the defense attorney of your answer and you hopefully get your money soon after. Now that financial compensation is headed your way, you may start to wonder about the potential taxes that may apply and cut into the money you just fought to receive.

Fortunately, compensation received through a personal injury claim is not taxable under either state or federal law, regardless of when your case was settled during the court proceedings, or even if it was settled without ever going to court. Damages received as a result of a personal injury lawsuit are excluded from a taxpayer’s gross income under federal tax law. This includes any typical personal injury damages intended to compensate the injured person, such as emotional distress, lost wages, pain and suffering, medical bills, attorney fees, and loss of business.

In certain cases, your compensation will be taxable. Punitive damages are always taxable. If your case includes a punitive damage claim, your lawyer should ask the jury or judge to separate their verdict into punitive and compensatory damages in order to prove to the IRS that part of the damages were compensatory, and therefore not taxable.

In other cases, if your lawsuit is based on a breach of contract, even if it resulted in an injury, your damages will be taxed.

The third way a portion of your damages could be taxed is if it has accrued interest. In cases where your case is not settled and it ends with a verdict, the defendant may attempt to appeal the decision. In most cases, interest would start to accrue starting from the date you filed your suit, so depending on the length of the initial trial and subsequent appeal, you could receive interest on the amount of the unpaid verdict. In this case, only the interest would be taxable.

Personal injury settlements and verdicts are intended to compensate you for the negligence of someone else. In order to ensure that as much of your settlement or verdict as possible is not taxable, it’s important to have a skilled and experienced personal injury lawyer by your side. At The Perecman Firm, P.L.L.C., our New York City personal injury attorneys have over 30 years of experience fighting for our clients. We understand the stress and instability that serious injuries can cause you and your loved ones, so contact us today for a free evaluation, or call us at (212) 577-9325 to set up a meeting with one of our attorneys.

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