Do I have to pay taxes on my car accident settlement?

Yes and no, some portions of a car accident settlement are taxable. Whether you pay taxes depends on what type of damage awards you received in the settlement. For example, you may have to pay taxes on a settlement for your lost wages.

However, you do not have to pay taxes on certain damages you recovered in your car accident settlement. For instance, if you suffered a physical injury in the car accident, you will not have to pay taxes for the compensation you recovered for medical bills. Additionally, you may not have to pay taxes on a settlement amount that reimburses you for repairing or replacing your car.

Taxes on a Judgment From a Court vs. an Insurance Settlement

The Internal Revenue Service (IRS) does not distinguish between a settlement negotiated with an auto insurance company and a judgment rendered in a jury trial for a car accident lawsuit. The IRS looks at what you received the compensation for, not the way you received compensation.

Taxable Parts of Your Car Accident Settlement

The following are some settlements the IRS deems taxable:

Lost Wages

The compensation you recover for lost wages is taxable because your regular wages would have been taxed had you been working. Depending on the severity of your car accident injury, you may have received a settlement for wages you expect to lose in the future. You will have to pay taxes on that portion of your award too.

According to the IRS, severance pay and back pay are taxable. Keep in mind that you will also have to pay Social Security and Medicare taxes from your lost wages.

Punitive Damages

Punitive damages are treated as taxable income because this type of award is not intended to reimburse you for your injury or other losses from your car accident. Punitive damages are intended to punish a defendant for reckless behavior that harmed someone and to deter others from behaving the same way in the future.

Interest Income

Receiving a car accident settlement from an insurance company or a jury award takes time. If you recover compensation, interest can be added to the award, and this interest is taxable.

To ensure that you pay the appropriate amount of taxes and are not subject to an IRS penalty, you may want to consult with your car accident lawyer or your tax advisor.

Exceptions for Paying Taxes on Damages for Medical Bills

According to the IRS, if you claimed an itemized deduction in a prior tax year for medical bills related to your car accident injury, you will have to pay taxes on those expenses in the year you received your settlement award.

Otherwise, you do not have to pay taxes on a settlement for medical expenses related to a physical injury or physical sickness.

Taxes on a Pain and Suffering Award

You do not have to pay taxes for non-economic damages, such as pain and suffering, and emotional distress, as long as the damages resulted from your car accident.

Pain and suffering comes from the physical pain you suffered because of your accident. Emotional distress is the negative mental reaction you had to your accident.

In civil cases that do not involve a personal injury, such as harassment or discrimination, damage awards for pain and suffering and emotional distress are taxable.

Would a Structured Settlement Work Better for Tax Purposes?

No matter how you choose to receive your settlement, some car accident settlement awards remain taxable. To structure your settlement means that you would receive fixed monthly payments over a certain period of time. Insurance companies usually set up an annuity for structured settlements. You can also add beneficiaries to the annuity.

You can also choose to receive your settlement in a lump-sum payment. You will have to pay more taxes all at once with a one-time payment. You can speak to your financial advisor to determine the best way to save your money over time for your ongoing medical needs.

Contact OEB Law, PLLC

At the OEB Law, PLLC, we can help you pursue compensation for medical bills, lost wages, and other damages.

We also handle all aspects of car accident injury claims. We file personal injury claims on behalf of accident victims and negotiate settlements on their behalf with the at-fault driver’s insurance company. When necessary, we will file a lawsuit and take the matter to court.

We work on contingency, which means you do not pay us unless we recover compensation in your case.