Are Medical Malpractice and Personal Injury Settlements Taxable?
If you have been injured by a negligent doctor, a drunk driver, or any other negligent or reckless actor, you may be entitled to compensation for your medical costs, expenses, and other associated damages. But is a personal injury damages award or settlement taxable? If you are simply getting the responsible party to pay for the bills they have caused you to incur, do you still owe a portion of those damages to New York or the federal government? The answer: It depends. A knowledgeable Hudson Valley medical malpractice and personal injury lawyer can help you understand what portion of your damages may be taxable and which may be exempt.
Medical Malpractice and Personal Injury Settlements and Verdicts Are Generally Not Taxable
State and federal tax laws generally apply taxes by defining whether or not something is “income.” Income is taxable. Personal injury compensation is generally considered to be compensation for a loss rather than profitable income, and general tax theory indicates it should not be taxed.
Applying that principle, federal and New York State tax laws generally consider both settlements and jury verdicts in personal injury cases to be non-taxable. You do not need to declare compensatory damages for physical injuries or illnesses on your taxes. (We discuss non-physical damages below.) Lost wages, medical bills, and other associated expenses connected to a physical injury are exempt from both federal and New York State tax.
Parts of a Settlement are Taxable
There are portions of a personal injury award that are taxable. For this reason, it is important that your attorney negotiates a settlement that divides up any damages award into a favorable categorization of damages and minimizes taxation.
Punitive damages awards, as opposed to compensatory damages, are taxable under federal law. Your personal injury attorney will ensure that your award is separated into comparative and punitive awards so that you can report only the punitive portion to the IRS.
Additionally, interest on the judgment may be taxable. Many judges will award interest on your damages calculated back to the date that you initially filed your lawsuit. For example, if you filed your initial claim on June 1, 2018, and you were awarded $10,000 on December 1, 2019, after winning at trial, the judge may order the defendant to pay you 18 months’ interest on $10,000. That interest would be taxable.
Changes Under New Tax Law: Non-physical damages
A new tax law pushed by President Trump and signed into law at the end of 2017 adjusted the analysis of whether personal injury compensation is taxable. Under the law, effective as of 2018, compensation for physical injuries remains non-taxable, but compensation for emotional distress and other non-physical injuries are taxable.
The new rules are difficult to define and apply: Emotional trauma caused by specific physical injury such as dismemberment may be non-taxable, while compensation for a physical illness such as headaches or insomnia caused by emotional distress may be taxable. Additionally, under the new law, legal fees are generally non-deductible. If the entire basis of the lawsuit was emotional distress, your award might also be subject to New York tax law. Your personal injury attorney can help you identify and maximize your non-taxable recovery.
Recover Compensation For Your Personal Injuries After an Accident in the Hudson Valley
If you or a loved one has been the victim of someone else’s negligence in New York, find out if you’re entitled to money damages through a personal injury lawsuit by contacting the dedicated and effective Hudson Valley medical malpractice and personal injury attorneys at the Law Office of Taran M. Provost, PLLC, with offices in Mahopac and Poughkeepsie.