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If you are in negotiations or just agreed to a car accident settlement with an insurance company, you may be wondering whether it is taxable. Fortunately, the majority of your compensation is not taxable in White Plains, New York. However, some portions can be depending on the types of damages you recover.
When are Car Accident Settlements Taxable in White Plains, NY?
Taxes may be imposed by the State of New York and the federal Internal Revenue Service (IRS) on some types of compensation but not others. For example, New York taxes compensation if you suffered an emotional injury but not a physical one. However, federal tax laws are virtually universal, and the IRS’s Settlements – Taxability guide states the following:
Medical Expenses
If you paid for accident-related medical expenses in previous years and did not take deductions on your tax returns for them, then the compensation you recover for your medical bills and related expenses is tax-free. When a portion of a car accident settlement is for medical bills that you made deductions for in prior year(s), and they resulted in a tax benefit, you will owe taxes on that compensation. If part of the settlement is for multiple years of medical expenses, you will have to pay pro-rata taxes on the total amount of medical expenses paid for each year they were listed as deductions.
Lost Wages
If you had not been injured, you would have remained working and would have had to pay income taxes on your wages. As a result, you will have to pay income tax for any lost wages compensation you receive, just as you would on a regular paycheck.
Property Damage
The compensation you recover for property damage is not taxable unless the amount you receive exceeds the property’s adjusted basis (net cost of an asset). If that is the case, taxes must be paid on the excess amount, just as you would on regular income.
Pain and Suffering
Any compensation awarded in a settlement for pain and suffering, as well as other non-economic losses that are related to a physical injury or illness you sustained, are not taxable. However, if your pain and suffering damages are linked to an emotional injury and does not involve a physical injury, the money is taxable.
Punitive Damages and Judgment Interest
Compensation in the form of punitive damages or interest on the settlement is taxable by the IRS as “Other Income.” Punitive damages are rarely awarded, though, as they are meant to punish the defendant for egregious behavior. Whereas interest can be added to a court verdict for the amount of time, your claim has taken to resolve.
Get Help With Questions on Your Settlement
If you or a loved one has additional questions regarding a potential car accident settlement and how much money you will lose to taxes, schedule a free consultation with a White Plains Car Accident Lawyer. We also serve car accident victims in Westchester County. We can discuss your options; call (914) 993-0393 today.