You may be wondering: is pain and suffering taxable? While pain and suffering isn't taxable when it is directly connected to physical injury, it may be taxable when you suffer from mental anguish or emotional distress caused by the injuries that you sustained. In Massachusetts, however, emotional pain incurred as a result of physical injury is not taxable. Here's why. The IRS considers pain and suffering as nontaxable income.
A jury award may include punitive damages, which are large amounts of money. Punitive damages are typically included in the final verdict of an accident case. Punitive damages are considered taxable because they are a reward for the plaintiff, and they are meant to punish the defendant. Normally, an accident victim would report these awards as "other income" on their tax returns. Pain and suffering are not taxable, but the interest on the award is.
The Trump Administration has signed new laws regarding personal injury and taxation. These changes only apply to money received from a personal injury jury award. The money must be largely related to the physical injuries. Emotional distress is not a deductible part of a personal injury. To qualify, money must be incurred to ease the recipient's emotional distress. It's also taxable if the damages are unrelated to physical injury or illness.
In addition to compensatory damages, there are punitive damages. These are separate from compensatory damages. They are intended to make you whole and pay back your damages. Thus, a $10,000 personal injury jury award isn't a financial windfall. This amount is likely to be taxable under New York state law and the IRS. But it's not impossible to recover some of the emotional stress you experienced after the accident.
Aside from pain and suffering, medical expenses and lost wages should be included in personal injury settlements. Even though these damages may be taxable, attorneys' fees and legal costs are typically nontaxable. Any money awarded for lost wages, for example, is taxable. Furthermore, the IRS considers the money as "normal" income. As long as the payment exceeds $1,000, it will count as ordinary employment earnings. If you're awarded more than $15,000 for pain and suffering, the entire settlement amount is tax-exempt.