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Are Car Accident Settlements Taxable?

Are Car Accident Settlements Taxable?In almost every case, no, car accident settlements are not taxable. Theoretically, there might be specific portions of your settlement that are subject to state and/or federal taxes, but in practice, this truly almost never happens.  The information provided here is just that, for information only, and hopefully, to put your mind at ease about potential tax liability following a car accident settlement.  If you hire a Long Island car accident lawyer to pursue a settlement on your behalf, and this is a concern for you, we will explain the extremely unlikely conditions that could trigger certain parts, if any, of your settlement you must pay taxes on, and discuss options for potentially reducing what taxes you owe.
Edward Friedman
REVIEWED BY Edward Friedman May 25, 2026
In This Article
Reading time: 5 minutes
  1. What Part of My Car Accident Settlement is Not Taxable?
  2. What Part of My Car Accident Settlement is Taxable?
  3. Are There Legal Ways to Reduce the Taxes Owed on a Car Accident Settlement?
  4. How Do I Get a Car Accident Settlement?
  5. How Much is My Car Accident Case Worth?
  6. Fight for the Car Accident Settlement You Need With Our Assistance

What Part of My Car Accident Settlement is Not Taxable?

Taxable and non-taxable income might differ somewhat depending on whether you are discussing federal or state taxes. In general, however, compensation you recover for a physical injury or illness is not taxable. This includes:
  • Past and future medical expenses
  • Property damage and related expenses
  • Past and future loss of income
  • Emotional distress caused by physical injury or illness
  • Physical pain and suffering
  • Partially or totally disabling injuries
The money an accident victim receives for these losses is designed to make up for what they lost, not provide them with a net profit or “free money.” For that reason, the governments of the United States and New York do not collect taxes on this money.

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What Part of My Car Accident Settlement is Taxable?

According to the Internal Revenue Service (IRS), you might owe federal taxes if you win punitive damages. Punitive damages do not compensate you for any particular injury: they are only used to penalize an especially negligent or reckless at-fault party. They do not count as direct compensation for an injury or illness and are therefore taxable. Punitive damages are also taxable at the state level.  You would also owe state taxes if, for example, you earned any interest (i.e., profit)  on the case proceeds after settlement.  Such interest would be taxable, even when the settlement itself is not.

Will I Get Punitive Damages in My Case?

The standard for punitive damages in New York is strict and applies only in exceptional cases. As stated in the language of one of the controlling cases in this area, the wrongful conduct in question must manifest "spite or malice, or a fraudulent or evil motive on the part of the defendant, or such a conscious and deliberate disregard of the interests of others that the conduct may be called wilful or wanton."  Something more than mere commission of a tort is always required. Punitive damages are awarded to punish and deter behavior involving moral turpitude. The conduct must purposefully cause, or be grossly indifferent to causing, injury.  For these reasons, punitive damage awards are extremely rare. (See Marinaccio v. Town of Clarence, 20 N.Y.3d 506 (2013) )  Accordingly, most accident victims do not need to worry about receiving or paying taxes on punitive damages. 

Are There Legal Ways to Reduce the Taxes Owed on a Car Accident Settlement?

It is possible, yes:
  • Your lawyer could make sure that most, if not all, of the damages you ask for fall into non-taxable categories, which would minimize the taxes you owe.
  • Your attorney could also ensure you understand the rules regarding when car accident settlements are taxable, which would prevent misunderstandings, late tax payments, or having to pay interest on taxes.
  • You could ask an accountant or another professional to file your taxes for you or review your tax documents for accuracy before you submit them.
Even if you believe that none of your settlement is taxable, you might want to get a tax professional’s opinion to avoid any problems. The fact that you are seeking a car accident settlement means that you already have enough financial and other worries on your mind, and confusion over taxes is the last thing you need.

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How Do I Get a Car Accident Settlement?

First, you have to show that you are qualified to recover a settlement. This involves proving the following four points:
  • The at-fault party owed you a duty of care, meaning that they had a legal responsibility to behave cautiously and take reasonable actions to prevent accidents.
  • The at-fault party breached their duty of care by failing to yield, speeding, or engaging in another kind of negligent behavior.
  • The negligent act caused your accident: the collision would not have happened or would not have been as bad if the liable party had been more careful.
  • The accident caused a qualifying injury: you only have the right to pursue a settlement from the liable party if you suffered a serious injury.
You could prove these points with evidence like accident reports, witness and expert testimony, photos, video footage, and medical records. Once we have proven that someone else’s negligence caused your accident, we will file a claim against their insurance company. While our law firm is willing to go to trial when necessary, most cases do not require such an action.

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How Much is My Car Accident Case Worth?

The evidence our auto accident lawyers collect will tell us how much your case is worth and how much you should ask for based on each type of loss. We will consider factors like:
  • How severe your injuries are
  • What aspects of your life have been impacted by your injuries and to what extent your life has changed
  • Applicable insurance policy limits
  • The estimated future cost and impact of your injuries
It is vital to ask for an accurate and just amount of compensation. Even though most of your car accident settlement is not taxable, there are other bills to be paid: you will be using a significant portion of your settlement to pay outstanding and future bills, including medical costs and replacement services (e.g., housekeeping or childcare). You are not allowed to ask for more money if your settlement runs out. Before approaching the at-fault party with a demand for compensation, let our car accident attorneys figure out how much your case is worth. We will calculate your damages, fight for the money you are entitled to, and even look for ways to reduce any taxes you owe, if necessary.

Fight for the Car Accident Settlement You Need With Our Assistance

Friedman & Simon, L.L.P., will create a custom legal strategy by taking into account all of the unique facts of your case, including what damages you suffered and how much of your car accident settlement is taxable. Call our legal team today for a free consultation.

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