Are Personal Injury Settlements Categorized As Taxable Income?

As someone who has been struck by difficulty due to someone else’s negligence, you’ve most likely found yourself in the process of receiving a personal injury settlement.

With a lawyer by your side, you’ve likely spent some time arguing and negotiating opposing arguments to show just how much is owed to you. At this rate, it is safe to assume that you’ll need to get even more out of your efforts to ensure that you’re compensated for your trouble.

Considering that the majority of personal injury cases resolve before or during a trial, you’re most likely in the midst of receiving your settlement and applying your finishing legal touches. Now that you’ve accepted an insurance company’s settlement offer, signed a release, and are waiting to resolve the case and receive your compensation, you’ll also need to worry about finding the answer to this question: “Are personal injury settlements recognized as income, and are they taxable?”

The tale of taxes

As the government continues to find more taxes to charge American citizens, it’s understandable to have some level of concern about personal injury settlements and tax.

For years, those receiving settlements have become more careful because of common dilemmas in relation to giving up a significant chunk of what is due to them based on growing tax controls. The unfortunate truth is that the government is still very much entitled to a share of a settlement because of existing laws. This has caused many to wonder whether or not their settlements are classified as taxable income! 

Knowing the damages to keep an eye out for

Before you think about your settlement and tax requirements, it’s important to first know which specific damages are recoverable in personal injury lawsuits. Here are the most commonly claimed costs where the government is likely to have a cut: 

Medical expenses: Damages that are awarded to compensate accident victims for the full value of medical treatment related to an accident and the associated injuries

Lost wages: Damages that are awarded to compensate an accident victim for the payments that are forfeited as a result of not being able to work, and this amount can also include the loss of earning capacity and future wages

Assorted non-economic losses: Damages awarded to provide compensation for things like disability, pain, suffering, and the decreased quality of life following an accident

The one form of compensation that is not taxable

Amid all the different types of settlements that you can receive during a personal injury case, it’s important to know that compensation for physical injuries isn’t taxable. When we talk about the scope of compensation for the damage in question, we’re referring to various expenses related to remedying handicaps or injuries caused by negligence, such as: 

  • Lost wages
  • Medical bills
  • Pain and suffering
  • Interest on a judgment

What can you get taxed for in your settlement?

When it comes to expecting government intervention, it’s best to be mindful of the specific forms of damages exempt from no-tax laws, especially for those subject to New York’s state tax. 

For one, damages that result from a breach of contract based on specific issues that arise in your case are taxable forms of income. On the other hand, compensation in the form of punitive damages—those utilized as a form of punishment for grossly negligent behavior and economic reimbursement—is also recognized as income and is taxable.


While there are many different factors that you’ll need to consider and worry about as you manage your personal injury settlement, it’s important to be mindful that some of your damages also most likely will be taxed. Through this guide’s help and the key points mentioned above, you can best prepare for any deductions that may be taken from your compensation or settlements! 

Do you need more injury compensation guidance in New York or want to learn more about how you can reduce taxes paid on personal injury settlements? Then you have come to the right place. Our experts at Housenbold Law have many years of experience in the industry to help your case. Get in touch with us today for a free consultation!