It’s a long and exhausting process to fight for compensation after a car accident when you’re already injured and in pain. Rosedale Personal injury attorneys can be a huge help in getting reimbursed for medical bills, lost wages and pain and suffering. We can also explain what parts of your settlement might be taxed so you know what to expect.
Damages related to the injury generally aren’t taxable, while damages not from the injury are. Medical expenses and pain and suffering should be exempt from taxes, but punitive damages are not. Similar damages are tax-exempt and taxed in wrongful death cases as well in Maryland.
You can also call Rice Law at (410) 694-7291 for a free case assessment from our Maryland car accident lawyers.
Are Medical Damages from Car Accidents Taxable in Maryland?
The largest percentage of the settlement award for many accident victims is for medical expenses. Some of the more common–and severe–injuries include whiplash, spinal cord injuries, traumatic brain injuries, burns, and back injuries.
If you’ve received a settlement for personal injuries, you do not pay taxes on that money. These types of damages are not taxed as they are seen as reimbursement for your out-of-pocket losses.
However, the story is different if you took a medical itemized deduction related to the injury in prior years. The IRS states, “You must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit.”
Are Non-Economic Damages from Car Accidents Taxable?
People in car accidents often experience emotional distress such as depression, anxiety, or PTSD (Post-Traumatic Stress Disorder) as a result of the trauma. Though complicated, the IRS generally divides this type of pain and suffering into two categories:
Pain and Suffering from the Injury
Emotional distress “originating from a personal physical injury or physical illness” is treated the same as the section above on medical damages. You would not pay taxes on those emotional damages because they stemmed from a physical injury.
Pain and Suffering Not from the Injury
Proceeds from emotional distress that does not originate from a personal injury or physical illness are taxed. For example, if you develop a phobia of driving after the accident, but it is not because of an injury, you must pay taxes on those damages.
Are Lost Wages or Profits from a Maryland Car Accident Taxable?
If you were in a vehicle accident, you may have had to miss work due to injuries. Your settlement may have included damages for lost wages.
The IRS does tax lost wages as it sees them as comparable to the wages you would have earned and would have had to pay taxes on.
The same is true for lost profits from your trade or business. The settlement money for those profits is taxed as business income.
Are Punitive Damages for Car Accident Lawsuits Taxable?
It is unusual for punitive damages to be awarded in a car accident settlement. But, in the event that you are awarded them, punitive damages in a settlement are always taxable, regardless of what they were awarded for.
Let’s say you were in a car accident and received $40,000 in compensatory damages due to the other driver’s, and, let’s say all of that went to cover medical expenses. You’ll owe no taxes on that money.
However, suppose it was found that the actions of the other driver were particularly egregious. and you received an additional $1 million in punitive damages. That $1 million dollars will be taxed, even though your damages were all medical-related.
Punitive damages only come from the court, so you cannot get them, and don’t have to worry about whether or not they are taxable if your case settles without a trial.
Are Fatal Car Accident Settlements Taxable in Maryland?
If your loved one recently died in a fatal motor vehicle accident and you pursue a wrongful death claim on their behalf, you and other beneficiaries may get damages from a settlement. Like personal injury settlements, some parts of wrongful death settlements are taxable, and others are tax-exempt.
Compensatory Damages
Compensatory damages in fatal car accidents are generally tax-exempt. That includes compensation for the deceased victim’s medical damages, funeral and burial expenses, and their survivors’ emotional distress.
Punitive Damages
Punitive damages awarded in fatal car accident lawsuits remain taxable, even when the victim dies. Punitive damages are always in addition to compensatory damages, so their being taxable shouldn’t affect your ability to cover medical costs and other expenses from the victim’s death.
Is Filing a Car Accident Lawsuit Worth it if My Settlement is Taxable?
While you should understand how taxes might affect your car accident settlement, you shouldn’t let that stop you from pursuing compensation against the liable driver. We can explain what is and isn’t taxable, so you are mentally prepared for possible taxes when your case resolves.
It’s still worth it to file a car accident lawsuit, even if some damages in the settlement are taxable, such as lost wages. You likely have substantial tax-exempt damages from medical bills and pain and suffering due to injury. You can recover these damages in full and not have to worry about paying taxes on them, which may make up most of your settlement.
FAQs About Taxable Car Accident Damages
Can You Estimate How Much of Your Settlement is Taxable?
Before you sign the settlement agreement, our Maryland car accident lawyers can confirm how damages are categorized, whether having derived from injury or not, and estimate the portion of your settlement that might be affected by taxes.
Is Interest on Car Accident Settlements Taxed?
You may have received pre-judgment interest or post-judgment interest along with your settlement. Even if your settlement was tax-free, your interest is not. The IRS requires you to pay taxes on it.
Are Damages from Vehicle Damage Tax-Exempt?
While most compensation from a car accident settlement is for physical injuries, some may be for damage to your vehicle. Since this money is considered set aside for repairs and possibly a rental car, the IRS does not treat it as income.
There are no taxes due on damages to your vehicle resulting from the car accident.
Can You Structure a Settlement so it’s Tax-Exempt?
When structuring a settlement, identifying damages as having derived from a physical injury is important, as this distinction is generally what makes damages tax-exempt or not.
Do You Need a Lawyer to Know Which Car Accident Damages Are Taxable?
Personal injury plaintiffs often don’t realize that parts of their settlement may be taxable, leaving them with less money than they anticipated from a settlement.
Are Car Accident Jury Awards Taxable in Maryland?
When it comes to jury awards, the same damages are taxable and tax-exempt as for out-of-court settlements.
Call Our Maryland Lawyers for Help with Your Case Today
For a free case review from our Maryland car accident lawyers, call Rice Law at (410) 694-7291.