It’s a long and exhausting process to fight for compensation after a car accident when you’re already injured and in pain. Personal injury attorneys can be a huge help in getting reimbursed for medical bills, lost wages and pain and suffering.
Once you’ve received your settlement, you can at least put that chapter behind you. Get caught up on medical bills.
But you may not be aware that you may have to pay taxes on the settlement money you’ve received. Whether you do and how much depends on the facts and circumstances of your case.
It is always best to talk to a tax advisor to get official tax advice. You can use this page to help formulate questions when talking to a professional about taxation on your car accident settlement.
You can also call the Law Offices of Randolph Rice at (410) 694-7291 if you have any questions or need help regarding your car accident settlement.
Medical Damages from car accidents Aren’t Taxable…for the most part
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 chord 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.”
The taxes on emotional damages are more complicated
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:
- 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.
- 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.
Lost wages or profits are 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 paid 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.
Punitive damages are taxable
It is unusual that punitive damages are awarded in a car accident settlement. But in the event that you were 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 you received $40,000 in compensatory damages due to the negligence of the other driver. And let’s say all of that went to cover medical expenses. You’ll owe no taxes on that money.
But 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.
Interest is taxed too
You may have received pre-judgement interest or post-judgement 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.
Compensation for vehicle damage is generally 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 seen as set aside for repairs and possibly a rental car, the IRS does not see it related to your income.
There are no taxes due on damages to your vehicle as a result of the car accident.
Contact our attorneys for help with a car accident claim
The attorneys at The Law Offices of Randolph Rice are prepared to help you if you’ve been a car accident. We will work to get you the best settlement offer possible. If you have serious injuries and insurance refuses to pay, we may decide to take your case to trial.
Either way, we will fight to get you the compensation you deserve. Call (410) 694-7291 for a free consultation today.