As a victim of personal injury, the legal procedure can be intimidating and confusing. Negotiating proper compensation with an insurance company might take weeks, months, or even years. However, it’s vital to look beyond the amount of money provided and consider how the settlement is arranged.
Here is a detailed guide by a New York City personal injury lawyer on paying taxes on personal injury settlements in NYC.
Ensure that you understand the settlement’s structure and identify any sections that may be taxed before you sign any settling offers. Unsuccessfully designed payments that involve punitive damages, for example, might raise your tax obligation and cost you thousands. Always seek legal counsel before accepting a settlement. You can maximise your legal benefit by consulting with an attorney before making an offer.
This guide will help you determine if any compensation you receive in a personal injury case is taxable. Many people wonder if their injury settlement is chargeable, or more precisely, if damages are taxable when they receive a reasonable settlement offer or verdict, either through a jury trial or a settlement with the defendant. One of the most common legal answers to these issues is: It’s all up to you. When it comes to compensation, several factors come into play.
Tax-free Compensation for Physical Injuries and Illnesses:
Compensatory damages are what they sound like: compensation. Their goal is to restore the afflicted person’s health as much as possible. For medical expenditures, lost wages, mental distress, and physical pains, they reimburse the plaintiff. However, neither the IRS nor New York State law imposes taxes on these items, with the same standards and exceptions.
Illness, injury, or disease:
Damage to a body part is self-explanatory when it comes to a physical injury. One’s irresponsibility can lead to a physical ailment for someone else. When it comes to lung cancer produced only by exposure to asbestos, negligence is a significant factor in its development.
After all, “the settlement money collected is essentially to pay for losses that happened because of another person’s negligence,” according to New York law. Distress, hardship, and emotional stress are not taxed when a person suffers from a physical injury or illness.
Psychiatric Anxiety & Depression:
An injury or disease that results in physical discomfort or emotional misery will not tax damages for pain and suffering. It’s conceivable that the New York state law will tax compensatory damages when the foundation for a case is emotional anguish, and no physical injury or disease was involved.
When a personal injury case alleges that a business experienced a loss and the owner’s reputation was injured owing to a false rumour spread carelessly or maliciously, the compensation will be taxable. However, there was no bodily injury or disease as a result of the incident.
There could be an alternative to the rule. Likely, the award will not be taxed if it includes money to reimburse the individual with psychological trauma or for out-of-pocket expenses incurred in treating the distress.
Unemployment as a Result of an Injury or Illness:
Loss of wages is not taxed in New York if it is part of the decision or settlement for the actual injury or illness.
Punitive Damages and Exceptions:
A judge or jury may award punitive damages to punish a defendant. Although punitive damages are rare in personal injury claims, it is crucial to know the tax effects of an order that may include them. Are punitive damages in New York taxable? Yes.
Earlier this year, a jury awarded $550 million in monetary damages and $4.14 bn in punitive damages to 22 women who stated they acquired ovarian cancer later in the life of using Johnson & Johnson baby powder. After investigating, they discovered the corporation sold the powder without alerting users of its dangers, which they deemed outrageous.
For example, since compensating damages are tax-free, whereas punitive damage awards are taxable, the award must be carefully crafted to distinguish between the two types of injuries. To determine your tax liability, you must ensure a settlement correctly lists the amount paid for both compensatory and punitive damages separately.
Costs of Medical Care Not Deducted in the Past:
Medical expenses deducted from tax returns must be disclosed as income if they are repaid in a subsequent year.
Workplace Lawsuits that Result in Wage or Income Loss:
Lost wages are not taxed if they are awarded or settled as part of the monetary damages for the physical injury or illness. Loss of pay is taxable, however, if it is the consequence of employment-related litigation, such as one alleging discrimination or wrongful dismissal, and the failure of wages is the outcome of that case. There are two reasons for this: The IRS and the state of New York both taxes lost wages and income if they had been earned.
Interest in the Decision:
Occasionally, the award after the trial or settlement includes interest accrued between the time of injury or sickness and when plaintiffs receive their compensation, but this is not the norm. New York State and the Internal Revenue Service (IRS) tax the value of the interest to be charged.
In some cases, it may be possible to avoid paying taxes.
Numerous legal issues are likely to be involved in your dispute and settlement. If you have to reimburse taxes on certain things, you may not have to pay taxes on others. Sometimes payments to a psychologist or counsellor are tax-free. Is that an emotional or physical symptom if you get an ulcer because of your boss? In the end, it will be determined by the court system. Since punitive damages aren’t intended to reimburse you for a loss, you can expect to pay taxes on the proceeds if you sue for them.
How Can a Lawyer or a Law Firm Assist?
You should always seek legal counsel before accepting any settlement offers. To assist you to comprehend the variations between different forms of damages, our lawyers at NYC Injury Attorney, P.C. can make sure that you are aware of the tax implications of each type. Depending on the circumstances, a poorly drafted settlement can result in thousands in taxes. If you forget to include any taxable components of the reward in your annual taxes, you may run into trouble with the IRS in the future.