Are Personal Injury Settlements Taxable in New York?

By Bobby Dallas, Esq. | Dallas Law, LLC | Updated September 2026

 

In most cases, no. Under federal law, money you receive for a physical injury or physical illness, including medical bills, pain and suffering and lost wages, is not taxable income. New York generally follows the same rule. Some parts of a recovery can be taxed, though: punitive damages, interest, reimbursement of medical expenses you already deducted, and emotional distress damages that aren't connected to a physical injury.

After a car accident, a fall or a construction injury, a settlement can bring real relief. Many clients then ask the next question right away: Will I owe taxes on this? The answer depends on what each part of the payment is for. The IRS doesn't apply one rule to the whole check. It looks at the reason behind each piece of the recovery.

 

The Federal Rule: IRC Section 104(a)(2)

The key law is Section 104(a)(2) of the Internal Revenue Code. It excludes from income any damages, other than punitive damages, received "on account of personal physical injuries or physical sickness."

The exclusion applies however you're paid:

  • A negotiated settlement or a jury verdict
  • A lump sum or scheduled payments over time

The idea is that these payments restore what you lost. They aren't new earnings.

 

What Is Usually Not Taxable

 

When your claim comes from a physical injury, the following are generally tax-free:

  • Medical expenses: past and future treatment, surgery, therapy and medication.
  • Pain and suffering: compensation for physical pain and loss of enjoyment of life.
  • Lost wages and lost earning capacity: this surprises many people. Wages are normally taxed, but lost wages recovered because of a physical injury are excluded, according to IRS Publication 4345.
  • Emotional distress caused by the physical injury: anxiety, PTSD or depression following a serious car, truck, motorcycle, pedestrian or construction accident.
  • Wrongful death compensatory damages: these are paid because of the decedent's physical injury.
  • Structured settlement payments: when a settlement is set up as a qualified structured settlement, each periodic payment, including its built-in growth, is generally tax-free.

What Can Be Taxable

 

Punitive Damages

Punitive damages punish especially reckless conduct, such as a drunk driver who causes a crash. They don't compensate you for a loss, so they're taxable even in a physical injury case. In New York personal injury cases, punitive damages are uncommon, but they do happen.

Interest

Interest is taxable even when the underlying damages aren't. It can come up in two ways in New York:

  • Interest that accrues on a verdict or judgment before it's paid.
  • Interest under CPLR 5003-a. If a defendant doesn't pay a settlement within 21 days after receiving the signed release and stipulation, the injured person can enter judgment for the amount plus interest, costs and disbursements.

The interest portion is reported separately, often on a Form 1099-INT.

Medical Expenses You Already Deducted

If you deducted injury-related medical costs on an earlier tax return and your settlement later reimburses those same costs, that portion may be taxable. This rule prevents a double tax benefit. It only applies if the deduction actually lowered your taxes, so people who took the standard deduction are usually unaffected.

Emotional Distress Without a Physical Injury

Emotional distress damages that aren't tied to a physical injury, such as some harassment or defamation claims, are generally taxable. One exception: amounts that reimburse you for medical treatment of that emotional distress remain tax-free.

Earnings on Your Settlement Money

If you invest a lump-sum settlement, the settlement itself may be tax-free, but the interest, dividends and gains it earns afterward are taxable like any other investment income.

The Attorney's Fee Trap on Taxable Amounts

The fee rule catches many people off guard. When part of a recovery is taxable, such as punitive damages or interest, the IRS generally treats the full amount, including the attorney's contingency fee, as your income. That's the U.S. Supreme Court's holding in Commissioner v. Banks (2005).

For most personal injury clients, there's no deduction for that fee. The miscellaneous itemized deduction that once allowed it was suspended in 2018, and the 2025 federal tax law made that change permanent. The practical result is that you can owe tax on money that went to your lawyer. This only matters for the taxable portion of a recovery. For the typical physical injury settlement, it doesn't come into play.

Does New York State Tax Personal Injury Settlements?

Generally, no. New York calculates state income tax starting from your federal adjusted gross income. An amount excluded federally under Section 104(a)(2) is generally not taxed by New York either. The same exceptions apply: punitive damages and interest that are taxable federally are generally taxable for New York as well.

Why the Settlement Agreement Matters

A well-drafted settlement agreement can spell out which amounts are paid for physical injuries and which are paid for other things. That clarity helps at tax time. There is a limit, however: the IRS is not bound by labels that don't match the real claims. An allocation has to reflect what the case was actually about.

This matters most in cases with several types of damages, such as serious motor vehicle accidents, slip and fall injuries, dog bites and construction accidents under New York's Labor Law. Review the settlement terms before you sign, not after the check arrives.

Frequently Asked Questions

  • Do I have to report my personal injury settlement on my tax return?
    Amounts excluded under Section 104(a)(2) generally don't need to be reported as income. Taxable portions, such as interest or punitive damages, do. If you receive a Form 1099, bring it to your tax preparer.
  • Are lost wages from a car accident settlement taxable in New York?
    Generally, no. Lost wages recovered because of a physical injury are excluded from federal income, and New York generally follows that treatment.
  • Is pain and suffering taxable?
    Not when it comes from a physical injury or physical illness.
  • Are structured settlement payments taxable?
    Payments from a properly structured settlement for a physical injury are generally tax-free, including the growth built into the payments.
  • Will the insurance company send me a 1099?
    Usually not for physical injury damages. You may receive a 1099 for any interest or punitive damages.

Talk to a Long Island Personal Injury Lawyer

There's no single answer to whether a personal injury settlement is taxable. Most compensation for physical injuries is tax-free, but the details of your case and your settlement agreement matter.

 

Dallas Law, LLC represents injury victims across Long Island, New York City and Westchester from our Melville office. We handle car accidents   construction accidents, slip and falls and other serious injury claims, with direct attorney involvement and clear communication throughout your case.

 

If you were hurt because of someone else's negligence, contact Dallas Law, LLC for a free consultation. We'll explain what compensation may be available. For the tax side of any recovery, we recommend that you work with a qualified tax professional.

 

This article is for general informational purposes only and is not legal or tax advice. Reading it does not create an attorney-client relationship. Tax treatment depends on your specific facts, so consult a qualified tax advisor about your situation.