Posted on 11/13/25
Reaching a fair settlement in your Buffalo personal injury case can bring relief knowing you’ve obtained the compensation you deserve from those who hurt you. Yet, you can be left with new worries when it comes time to file your taxes the following year. It’s vital to understand when personal injury settlements are taxable in New York and federally before you accept your payout.
Compensation for Physical Harm Isn’t Taxable in New York
If your personal injury claim involved physical injuries or illness, any payment you receive is not taxable by either New York State or the Internal Revenue Service (IRS). Also, you generally don’t owe taxes on compensation for emotional distress. However, it’s not as simple as it seems, since your emotional distress must accompany physical harm.
Here are some guidelines:
- Physical harm: Not taxable
- Emotional distress from physical harm: Not taxable
- Emotional distress without physical injury: Taxable in New York and federal UNLESS you have treatment costs for emotional distress, which is not taxable
Your settlement agreement will describe how much is included for specific damages, including medical bills, lost income, and mental anguish. Your injury attorney can work with you to negotiate this language and interpret it for tax purposes so you aren’t left with a tax burden you didn’t expect.
Lost Income Reimbursement May or May Not Be Taxable
Most personal injury lawsuits based on your physical injuries include lost wages as part of the demand letter. If you lost income because of your injuries, that amount is not considered taxable in New York or by the IRS.
However, an exception is in the case of an employment lawsuit where you are requesting lost wages for unfair treatment, termination, or demotion. In those instances, the government considers that income you would have earned and it’s taxable.
Punitive Damages You Receive Are Taxable
Your settlement for medical bills, along with the emotional distress and lost wages associated with your physical injuries or illness, is part of your compensatory damages. These are intended to pay you back for what you suffered as a consequence of the at-fault party’s actions. However, when the court awards punitive damages, these are separate and considered taxable income.
Settlement Interest Can Be an Unexpected Taxable Amount
If you win a jury award or reach a settlement in your personal injury case, it can take some time between when you were originally hurt and when you collect your compensation. During that period, your payout may accrue interest, which is taxable. If you aren’t prepared for this, you may experience problems when the amount is reported to the IRS and the New York Department of Taxation and Finance.
Settlement Structure Can Impact Your Tax Obligations
Most people assume they’ll get a large sum of money all at once when their case settles. However, some defendants may be unable to pay the full amount, requiring what’s known as a structured settlement. This provides an agreed amount every month or year until the full value is paid.
As we mentioned before, it’s extremely important that your settlement agreement clearly specify how much money applies to each type of loss, such as medical, emotional distress, lost income, and punitive damages. Otherwise, you could be paying taxes when you don’t have to because the IRS or New York found the language ambiguous.
Just like personal injury law, tax law is incredibly complicated, making it harder for you to move forward after your Buffalo accident case settles. Instead of facing these challenges alone, schedule a free consultation with Towey Law PLLC to discuss your personal injury case and learn how we can help.