If a personal injury case brought in New York State is successful, the injured person (and also members of their family, under certain circumstances) will receive financial compensation for their injuries, which can sometimes be a substantial amount of money. After all, under our system of civil laws that apply to such cases, financial compensation is essentially the only remedy available for injured people if they suffer physical harm due to the negligence of another. For many seriously injured people, the amount of money awarded is far more money than they have ever had at any one time in their entire life.
Imagine that you have received a very substantial settlement in a construction accident case (say, for example, you had fallen off a scaffold on a construction site, and had suffered very serious injuries to your spine which required surgery and which left you unable to perform construction work for the rest of your life) in which you were compensated for your pain and suffering (that is to say, for your actual physical injuries, as well as the psychological injuries caused by your accident and resultant disability), your lost wages, and your lost union benefits (such as your pension, medical insurance and vacation time). Upon feeling gratified in receiving compensation that is rightfully yours, the next thought is very likely to be: “Do I now have to pay a massive tax bill because I have been compensated for my injuries? After all, when I used to be able to work, and I earned a paycheck and benefits, I had to pay taxes on those things, so why wouldn’t I have to pay taxes on the money I have received from my case?”
The answer to this question for residents of New York State, thankfully, is usually “no”. As a general rule, proceeds of cases in which you are compensated for the consequences of physical injuries are not taxed. This is because, as a general matter (and in very simplistic terms), only “profits” are considered income that can be taxed, and any recovery had in a personal injury lawsuit is not considered to be profit but is simply a repayment of money that was taken away from the injured person due to the negligent conduct of another person.