If you are involved in a car accident lawsuit, there’s a good chance your case will be settled. You may be wondering whether you’ll have to pay taxes on your settlement proceeds. The short answer is that some portions of your car accident settlement are generally taxable while others are not.
Medical Compensation is Generally Not Taxed
Compensation for medical bills in a car accident settlement is generally not counted as taxable income. However, if you deducted medical costs on the previous year’s tax return and received a tax benefit, you will have to report the amount as income.
What About Pain and Suffering?
If emotional distress or mental anguish are the result of your physical injuries, you won’t pay taxes on this part of the settlement. However, if, instead, they’re the result of your lost income or inability to do your job, damages for mental suffering will likely be taxed.
Compensation for Lost Income is Taxable
The IRS treats compensation for lost earnings as taxable income. The reasoning is that if you worked and earned these wages, the money would’ve been taxed.
Vehicle Damage Usually Will Not Be Taxable
A lot of clients ask whether the money they receive to fix or replace their car will be taxed. Since you can only demand the full market value of your car, it should not be considered income.
When it comes to property damage, your lawyer is only trying to make you whole. They are not asking that you be paid more than what you paid to repair or replace your vehicle.
Punitive Damages Generally Will Be Taxed
It is rare that car accident victims are awarded punitive damages. However, if you receive any punitive damages, you will have to pay tax on them.
When it’s time to file your taxes, you’ll need to list this money on your 1040 form under the “Other Income” section on line 21. If you fail to include this income, you could face an audit or be told that you owe the government money.
Contact Our Legal Team to Discuss Your Case
If you’re worried that money from your settlement will be taxed, we can answer your questions. While some portions of a personal injury settlement may be taxable, that doesn’t mean your entire settlement will be.