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Are Personal Injury Settlements Taxable in New Mexico?

By Raymon Law Group on July 21, 2022

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Although our law firm does not usually offer tax advice, we feel that it is our responsibility to let our potential and current clients know the tax status of personal injury settlements. If you are seeking a personal injury settlement in New Mexico, or if you have received a personal injury settlement in New Mexico, you might wonder, is that personal injury settlement taxable as income?

The answer to this question is no, at least not typically. There are a few exceptions to this law, however.

The Internal Revenue Code Section 104 (a) (2) states that, “Amounts received as damages on account of physical injuries or physical sickness are excludable from income.”

Exceptions to the Tax Status of Personal Injury Settlements in New Mexico

There are a few exceptions to this rule:

  • Punitive damages – This means damages that are not meant to compensate the injured person, but rather, to punish the wrongdoer. A compensatory award of $100,000 is not taxable. A punitive award of $100,000 is taxable.
  • Interest on awards – This means that the interest you earn on an award is taxable, even if the award is not. For example, say that a judgment for $100,000 is entered in your favor for physical injuries or physical sickness stemming from personal injury. The judgment is appealed, and it earns $5000 in interest by the time the appeal is over. The original judgment of $100,00 is not taxable, but the $5000 interest earned on it is taxable.
  • Damages for emotional distress – Any awards that you have received for emotional distress are taxable. Payment of medical expenses to treat emotional injuries, however, is not taxable. So, an award you receive of $100,000 for emotional injuries is taxable, but an award you receive for $10,000 to treat those emotional injuries is not taxable.
  • Back pay for employment discrimination – Any back pay that you have received due to employment discrimination is taxable, as long as it does not stem from a physical injury or physical illness.
  • Income you have lost as a result of a physical injury or physical illness, and were later reimbursed in an award— This type of income is not taxable. Say, for example, that your award includes $10,000 for your inability to work due to your physical injury or physical illness. That part ($10,000) of the award is not taxable. This non-taxable income would include any income that comes from a disability insurance policy, a Workman’s Compensation award, and an income replacement insurance policy. “Overhead Replacement” insurance policies, however, are taxable.

If you do receive money from an award due to physical injury or physical illness, you will not be provided with a 1099 tax form to report this income to the IRS. Instead, these 1099 tax forms will be provided to your law firm. This is because any of your attorneys’ fees earned by the law firm during the process of representing you are taxable. The 1099 tax form issued to the law firm will be for the gross amount of the award or settlement. The IRS will then apply an “assumption test” to see if the law firm adequately reports income from its personal injury settlements. The Injured person does not have to claim the personal injury settlement received as income; therefore, the injured person does not receive a 1099 tax form.

If you have further questions about the tax status of a personal injury settlement you have received, or may receive, consult your tax professional for advice or assistance. If you need help in any personal injury case, please contact our New Mexico personal injury law firm for a free consultation.

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