Can the IRS Tax Your Motorcycle Accident Settlement?

Many of my clients who were injured in a New York motorcycle accident have suffered injuries usually worth approximately $500,000 and sometimes a lot more. With injuries that serious, tax consequences and tax planning methods to avoid the settlement money being taxed by the IRS must be considered.

After 17 tax credits in law school, this is a topic that interests me and on which I can write a few pages. For informational purposes only, I will attempt to provide a simple, general answer here in just a few paragraphs. You should not rely on this information, and you should consult a CPA, accountant, or tax professional regarding your specific circumstances before settling your case or before filing your tax return if you have already signed a release and settled your case.

IRC section 104(a)(2) addresses income exclusions for taxation of personal injury lawsuit settlement payments, which includes New York motorcycle accidents. Money paid for property damage and medical bills is not taxable because it is offset by a loss. Likewise, money paid for “pain and suffering” in the settlement of a personal injury claim is generally not taxable because it is compensation for a loss that is intended to make you whole again.

When is money paid to settle a personal injury claim taxable?

Lost Wages/Lost Income. Money paid for lost income is taxable.

Psychological Injuries. Money paid for psychological injuries may be taxable. The U.S. Court of Appeals for the District of Columbia in Murphy and Leveille, Appellants v. IRS and USA, Appellees, reversed a decision that money paid for psychological injuries is not taxable. The court ruled that the personal injury award Ms. Murphy received was “within the reach of the congressional power to tax under Article I, Section 8 of the Constitution”, even if the award was “not income within the meaning of the Sixteenth Amendment.” The U.S. Supreme Court denied review of the decision on April 21, 2008.

Punitive Damages. Money paid for punitive damages is taxable. IRC section 104(a)(2) was amended in 1996, making punitive damages taxable without regard to their connection to a physical or nonphysical injury or sickness.

Interest Earned after a Personal Injury Settlement. If you receive money for an injury that is not taxable and you deposit the money in a savings account or otherwise invest it outside of certain kinds of trusts such as a Special-Needs Trust or Pooled Trust, the interest earned is taxable. For more information about Special-Needs Trusts or Pooled Trusts, see

When money is awarded pursuant to a verdict after trial, the verdict will state how much money is paid for property damage, medical bills, lost wages, pain, and suffering, etc. The amount of your personal injury award, which is subject to taxation by the IRS or state tax authority, will be determined by the jury verdict.

The problem is when money is paid pursuant to a settlement, many lawyers frequently do not state in the release what the money is being paid for. It is possible for the IRS to make a determination by examining various papers in the file, such as the initial claim letter, the legal complaint, papers submitted to the insurance company as proof of damages, and the release which was signed.

This problem can be rectified with the proper wording in the settlement release. The usual “General Release” form is silent on tax issues and thus not helpful. It is, therefore, important to customize the release to address the tax issues. The provisions which result in a favorable tax status are often adverse to the insurance company’s interests. However, I have usually been able to successfully include provisions in my clients’ releases to prevent taxation of settlement proceeds.

If you have been hurt in a New York motorcycle accident, I will be happy to discuss the income tax implications of your settlement payment and the ways in which I can help you to avoid any income tax liability so that you do not have to pay any income taxes on your motorcycle accident settlement.

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Motorcycle Lawyer Phil FranckelPhilip L. Franckel, Esq. personally authored this page and all articles on

You may have met Phil Franckel and Rob Plevy at motorcycle events. Phil and Rob created the motorcycle awareness campaign BE AWARE MOTORCYCLES ARE EVERYWHERE®. They are Founding Partners of 1-800-HURT-911® New York, well-known in New York for representing motorcyclists. Phil is an Avvo Top Motorcycle Attorney with a 10 Avvo rating, Avvo Motorcycle Client’s Choice award with all 5-star reviews, Avvo Top Motorcycle Accident Contributor, and a former Member of the Board of Directors of the New York State Trial Lawyers Association.

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Motorcycle Attorney Phil Franckel talks about how motorcycle accidents are different

Philip L. Franckel, Esq. is the author of all articles and content on this website, one of the Personal Injury Dream Team™ Founding Partners at 1-800-HURT-911® New York, well-known for representing motorcyclists. He has a 10 Avvo rating; Avvo Client’s Choice with all 5-star reviews; Avvo Top Contributor; and is a former Member of the Board of Directors of the New York State Trial Lawyers Association. Mr. Franckel created the motorcycle awareness campaign BE AWARE MOTORCYCLES ARE EVERYWHERE®.

Founding Partner Rob Plevy, Esq.

New York Motorcycle Accident Lawyer and Founding Partner Rob Plevy, Esq.

New York Motorcycle Accident Lawyer and Founding Partner Rob Plevy, Esq.

Robert Plevy, Esq. is a motorcycle accident lawyer and one of the Personal Injury Dream Team™ Founding Partners at 1-800-HURT-911® New York. Robert began his legal career in 1993 as an Assistant Corporation Counsel defending The City of New York against personal injury lawsuits.

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