Personal injury lawsuits for car accidents often involve big questions about money. Injured plaintiffs tend to incur very expensive medical bills and other debts related to the accident and their injuries, and they want defendants to pay up. However, this leads to a very important tax question for plaintiffs who receive judgments or settlements from car accident cases.
In general, certain damages related to car accident settlements are not taxable. However, other damages may be taxable. No two cases are alike, and you should speak with an attorney about the kinds of damages you are seeking and whether they are considered taxable income. For the most part, compensatory damages are not taxed, but things like punitive damages may be taxed.
Our New York car accident lawyers can help you get a generous and fair settlement to cover your expenses if you were injured in a car accident. We can also help you determine how much of your settlement may be subject to taxation. Contact The Carrion Law Firm legal team for a free consultation today. Call us at (718) 841-0083 for assistance.
Tax-Free Damages in a Car Accident Settlement in New York
Most of your damages in a car accident settlement are probably not taxable. The purpose of compensatory damages is to place the plaintiff in the same financial position they were in before the accident. If compensatory damages were taxed and the government took a cut of your settlement, you would not be made whole.
Compensatory damages include any compensation for your economic and non-economic losses. Economic losses include medical bills, the cost to repair or replace your damaged car, and wages lost from missing work, among others. Economic damages are rarely taxed as you are essentially being reimbursed for the money you already spent or lost. Our Bronx car accident attorneys can help you keep track of your economic damages when negotiating a settlement.
Non-economic damages are also generally not taxable. These kinds of damages include less tangible losses whose values are more open to interpretation or argument. Pain and suffering are commonly claimed non-economic damages and may include physical pain and emotional or mental anguish and trauma. For example, the pain you endured after a serious surgery to correct injuries from your accident could be claimed as part of your damages. Similarly, mental suffering like anxiety, depression, or panic attacks related to your injuries can also be claimed.
However, non-economic losses must be related to a physical injury or illness to be exempt from taxation. Non-economic damages for emotional trauma unrelated to physical injury or illness would be taxed, such as embarrassment regarding a slanderous rumor. This should not present a problem for you as most car accident cases deal with physical injuries and related mental trauma.
Taxable Damages in a Settlement for a New York Car Accident
Not all damages in a car accident settlement are tax exempt. While most compensatory damages in car accident settlements are not taxable, punitive damages are always taxable. Punitive damages are subject to taxation because they are not designed to make the plaintiff financially whole again. Instead, these damages are meant to punish defendants for bad behavior. Money received for punitive damages is therefore treated as taxable income. In New York, there is no cap placed on punitive damages. This means that if punitive damages are awarded, they can be very high. While your case may deserve a punitive damages award, a significant award may push you into higher tax brackets.
While punitive damages are always taxed, it is unlikely that you will have to deal with this issue. Punitive damages are rarely awarded in personal injury cases. Most personal injury cases are based on ordinary negligence. Punitive damages require actions by the defendant that rise to a level of moral turpitude. This is a very high burden to meet, and punitive damages tend to be awarded only in very extreme cases.
Sometimes, things like medical bills can be deducted from your taxable income. If you already paid for medical treatment and then deducted that money from your taxable income, you would have to pay taxes on any compensatory damages for those medical expenses. Otherwise, you would be getting a tax break twice. Our Brooklyn car accident attorneys can help you track your spending and expenses related to your crash so you can get the largest settlement possible.
Avoiding Tax Complications in a New York Car Accident Settlement
With so many different rules surrounding the tax consequences of a car accident settlement, it is important to make sure your settlement is structured in a way that avoids tax complications. You might receive your settlement all at once in a lump sum payment. You could also receive your settlement in smaller amounts paid over time. If any part of your settlement is taxable, we must handle those funds separately.
A settlement must be structured carefully. When agreeing to a final settlement, plaintiffs and defendants often think of the total sum. However, parts of the total sum may be taxable while others are not. It can cause a massive headache later when filing your taxes if you do not know how much of your settlement is taxable. Our Long Island car accident lawyers can help you track your expenses and damages now, so your tax situation is made easier later.
Not only must we make sure that all the different types of damages included in the settlement are spelled out, but that the monetary value attached to the different damages be included. In this way, an ideal settlement will look like an itemized receipt.
Call Our New York Car Accident Attorneys
Car accident settlements might come with various tax consequences. Our Queens car accident attorneys can help you structure your settlement, so you know exactly what is and is not taxable. Reach out to The Carrion Law Firm for assistance. Call our offices at (718) 841-0083 to schedule a free legal consultation.