Jeff Varcadipane
May 19, 2025
If you’ve received a personal injury settlement, you might be wondering: Do I owe taxes on it? The answer isn’t always straightforward—it depends on the type of damages awarded and how the settlement is structured. Whether you’re in New York, New Jersey, or elsewhere in the U.S., understanding the tax implications can help protect your financial outcome.
Let’s break down when a personal injury settlement is taxable, when it’s not, and how to handle it correctly.
What Is a Personal Injury Settlement?
A personal injury settlement or award is a financial recovery to compensate victims for damages stemming from physical injury, emotional trauma, or both. These settlements are often the result of legal claims related to car accidents, slip-and-fall incidents, or workplace injuries. The award can cover a range of damages including medical bills, lost income, emotional distress, and pain and suffering.
If you’re unsure about how your specific claim might be treated under tax law, it’s best to consult with a personal injury lawyer who understands both state and federal regulations.
Settlements may include:
- Medical expenses
- Lost wages
- Pain and suffering
- Emotional distress
- Property damage
The way each category is treated by the IRS can vary.
When Are Personal Injury Settlements Taxable?
Generally, the IRS does not tax compensation for physical injuries or physical illness. If you were hurt and received a payout to cover medical bills or pain, those portions are typically tax-free.
However, other components are taxable, such as:
- Punitive damages – Awarded to punish wrongdoing, not compensate losses.
- Interest – Earned while the case is pending.
- Lost wages – Since wages are normally taxed, replacement wages are often taxed, but this too may vary depending upon the type of claim and the jurisdiction.
- Emotional distress – If unrelated to a physical injury.
- Employment claims – Discrimination or wrongful termination settlements are often taxable but depending upon the structure of the settlement, your attorney may be able to allocate certain types of damages into a non-taxable recovery.
So, while personal injury settlements aren’t always taxable, portions of them often are.
New York and New Jersey Rules
Both New York and New Jersey often follow federal tax guidelines on personal injury settlements. If the IRS considers a portion of your settlement non-taxable, your state will likely do the same.
However, local attorneys can ensure your settlement complies with both federal and state reporting requirements and is categorized in a manger that will help minimize tax liabilities to the fullest extent permitted by law. If you need legal advice, consider consulting an attorney specializing in personal injury law in New York or New Jersey.
Why Personal Injury Settlement Structure Matters
How you break down your settlement heavily affects the tax impact.
For example:
- Medical Costs: Non-taxable if you didn’t previously deduct them. If you did and got a tax benefit, that portion may now be taxed.
- Lost Wages: Taxable because it’s replacing income.
- Pain and Suffering: where stemming from a physical injury, non-taxable.
- Property Damage: typically not taxable unless the award exceeds the item’s value.
The more detailed your settlement agreement, the easier it is to defend against unnecessary taxation.
Exceptions and Special Cases
Certain parts of a settlement are always taxable, no matter the injury:
- Punitive damages
- Accrued interest in unpaid settlements
- Non-physical claims like defamation or reputation damage
If your agreement doesn’t clearly separate taxable and non-taxable amounts, the IRS may treat the full settlement as income. This is why it’s critical to consult an experienced attorney.
Do You Need to Report the Settlement?
Even if your settlement is mostly non-taxable, you may still be required to report it to the IRS, especially if you receive a Form 1099-MISC. If any part of your settlement is taxable and you don’t report it, you could face penalties and interest.
To avoid mistakes, consult a tax professional or a personal injury lawyer with experience in tax issues related to personal injury cases. You can find resources on IRS guidelines for settlements here.
Final Thoughts
So, are personal injury settlements taxable? Not always. Compensation for physical injuries and related medical costs is usually tax-free. But interest, punitive damage, lost wages, and non-physical emotional distress often are taxable.
The key is structuring your settlement clearly, so that taxable and non-taxable parts are properly allocated. When in doubt, work with professionals who understand both personal injury law and tax reporting.
At Varcadipane & Pinnisi, PC, we’ve helped clients across New York and New Jersey not only win fair compensation—but also keep more of it. Contact us today for a free consultation.
Jeffrey W. Varcadipane
Jeffrey W. Varcadipane is a Certified Civil Trial Attorney by the Supreme Court of the State of New Jersey and a Founding Partner of the Firm. He handles a variety of matters including civil and commercial litigation, appellate practice, real estate, and business law.
University: J.D. Fordham Law School
Bar Number: 29472005
Locations: New Jersey, New York, and Florida.
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