Many people after they have been involved in a car accident walk away with a settlement. Most people who are awarded a settlement would like to know if the IRS will take some of it. Unfortunately, there is no straight answer as it depends on the case in question. It can ultimately come down to what the money is for and how it can be broken down in terms of purpose (Such as compensation for medical bills).
A car accident claim will be valued and compensated and this compensation will be based upon pain and suffering, loss of earnings, medical bills and more.
For example, an award of $150,000 may be broken down into the following:
- $45,000 medical bills
- $30,000 lost wages
- $40,000 pain and suffering
- $20,000 punitive damages
- $15,000 property damage
Now let’s have a closer look at these types of damages:
Medical bills tend to be tax-free, however, if you have taken some deductions for your out-of-pocket expenses on another tax return and you were reimbursed for them you will have to pay tax on the reimbursement.
As you have to pay tax on your regular wages you will also have to pay tax on any settlement that you have received for lost wages. This is because you would have had to pay tax on your earnings anyway.
Pain and Suffering
Whether or not you will have to pay tax on the settlement you have received for pain and suffering is not always clear. The type of suffering you have had to go through will determine whether you have to pay tax. If the money has been paid to you because you were in pain and you suffered as a result of the accident you will not have to pay tax on it.
If you have received a payment because you have suffered from emotional distress you will have to pay tax. Emotional distress is taxable because it is hard to measure. However, it is so much easier to measure pain and suffering and to prove that you have been injured.
The Internal Revenue Code states that damaged such as these are not exempt from tax. This is the case even if the damages are as a result of the defendant’s bad behavior. This means that even though the defendant has to pay in order to prevent them from exhibiting the same behavior in the future, the money is still taxable.
Any settlement that you have received to compensate you for damaged caused to your property is not taxable. This may be because you have already paid the tax on the car, for example.
When you Need the Help of a Lawyer
There can be variations between states as to how they view car accident settlements, and how they are limited, and what is excluded from them. The amount of money that you are awarded may depend on your car insurance policy and the decisions the judge makes. Even if your car accident was a minor one it could help your case if you hire a car accident lawyer. This is because the lawyer may help you navigate the often complicated world of car accident claims.
If you are currently suffering from a personal injury and are unable to read ‘Are Car Accident Settlements Taxable?’ please watch our Injury Pedia video so you can gain the Personal Injury Information and Answers you are seeking.