According to the nation’s federal tax laws, the compensation an individual receives from an auto accident settlement is not taxable in most cases. These laws are incredibly detailed and include exceptions that leave many claimants confused with what exactly they need to file once tax season rolls around.
Do not worry if this whole situation seems too complicated. In this blog post, we are going to dive into the topic of whether personal injury settlements are taxable, how to report your settlement to the Internal Revenue Service (IRS), the mistakes you need to avoid, and how an experienced personal injury attorney can help you figure out these complicated tax issues.
Do You Pay Taxes on Insurance Settlements?
Usually, the IRS will only levy taxes on income, which means that the government will only tax money you receive from a settlement if it results in you receiving ‘income’ from an injury settlement.
Insurance settlements paid for personal injury claims are designed to make you whole after an accident or, rather, put you back in the same state you were in before the incident occurred. Injury settlements are NOT designed to make you better off financially than the position you would be in if the injury hadn’t happened. Most insurance settlements are not taxable.
The government cannot tax you for any gross income you receive from an injury settlement for physical sickness or personal injuries according to federal regulations. As a result, any compensation you receive from a car accident settlement covering compensatory damages such as medical costs and property damage is not taxable.
The following damages are generally considered to be tax-free:
- Medical bills
- Costs of doctor visits, surgeries, and prescription medication
- Temporary and permanent disability expenses
- Property damage
- Physical pain
- Physical sickness
- Pain and suffering resulting from the physical injury
- Lost quality of life
However, as is usually the case with government regulations, there are exceptions to this general rule, and there are instances where these insurance settlements may be taxable.
These exceptions will often depend on what is included in the settlement and how the settlement is structured.
Do You Have to Claim an Insurance Settlement on Your Taxes?
If you receive an insurance settlement for physical sickness or personal physical injuries, and you DID NOT take an itemized deduction for the medical expenses you incurred and paid that were related to your injury, then the amount you recover for your medical expenses is non-taxable and does not have to be included on your income taxes according to the IRS.
However, if you deducted from your taxable income the medical expenses you incurred related to your injury (and therefore received a tax benefit for doing so), then you must include the settlement money that is attributable to these medical expenses on your tax return in the section indicated as “Other Income.”
This is because you cannot list the expenses as a deduction and keep the settlement you receive tax-free.
If you need further clarification on these issues or are not sure if your insurance settlement is taxable, speak with an experienced personal injury lawyer as quickly as possible.
These lawyers can not only help you figure out whether you have to claim your insurance settlement on your taxes, but they can also refer you to professionals that can make sure your taxes are filed correctly.
Are Lost Wages Taxable?
There are portions of your car accident settlement that may be taxed. Typically, the federal government will tax the amount of your settlement that represents lost wages.
This is because the IRS believes that since you have to pay taxes on your income if you were not involved in a car crash, then you should have to pay taxes on these wages when you receive them through a settlement.
The taxation for lost income can get quite complicated and, depending on how your settlement is structured, it may even result in you paying a higher tax rate than you would pay in an average year. These lost wages may also be subject to employment tax withholdings, social security tax rates, and Medicare tax rates.
Due to these exceptions, if your car accident settlement check came in a lump sum, it is up to you to break down this amount into separate damages and make sure you know which amounts are taxable and which are not.
In these situations, it may be in your best interest to seek help from a tax preparer to ensure you are separating these amounts appropriately.
How Would Punitive Damages Affect Taxes?
Unlike compensatory damages, which are created to compensate the victim for losses, punitive damages are intended to punish the defendant for their egregious actions and to stop them from performing these acts again in the future.
For a victim to obtain these punitive damages, they need to show that the defendant was grossly negligent and exhibited a willful disregard for the safety of others. As a result, they are rarely awarded.
When the court does grant a victim these damages, this amount is considered taxable income by the IRS. You will need to list these punitive damages as income on your tax return and pay taxes on them.
Why is it Best to Get an Attorney for Help with Your Auto Accident Settlement?
Many people often assume that after a motor vehicle accident, the insurance company will want to work with them and help them get the money they need, especially if they were not at fault for the accident. This is far from the truth.
The insurance companies are a business, and like other businesses, they want to make a profit. By paying you out less money, the more money they make. That is why insurance adjusters will try any tactic they can to get you to admit fault for an accident so that they can reduce the amount of your claim or deny it altogether.
You do not have to tackle these deceitful insurance practices on your own. When you retain an experienced car accident attorney, these lawyers will take over these discussions and negotiations with the insurer for you and make sure you do not say anything that can affect your claim while fighting for a settlement amount that you need.
Contact an Experienced Lawyer for Help with Your Accident Settlement
Dealing with the IRS is already a complicated and tedious process. Add in the fact that you now have to figure out what part of your car accident settlement is taxable, and the whole situation can become quite overwhelming.
When you work with an experienced personal injury attorney, you do not have to try to figure out this complicated ordeal on your own.
At The Miley Legal Group, we are here to help you and your claim from start to finish. We will not only walk you through everything you need to know about your legal case but once we obtain the settlement you want, we can help you address these complicated tax nuances.
Our skilled personal injury attorneys have the experience, resources, and dedication needed to take on your case and fight for the damages you deserve. We do this by:
- Going over your case in detail, answering any question you have, and discussing the possible legal options you can pursue.
- Investigating your accident thoroughly and obtaining the evidence you need to prove what happened and who was at fault.
- Handling all the negotiations and discussions with the insurance company and making sure to fight for a fair settlement amount on your behalf.
- Ensuring that all your documents and motions are filed before time runs out.
- Bringing in the experts such as accident reconstructionists and doctors to substantiate your claims.
- Taking your case to trial if the other side is unwilling to negotiate fairly and pursue maximum compensation.
- Ensuring your settlement amount is taxed appropriately and that you avoid any IRS penalties.
Do not wait any longer if you have been harmed in a car accident. Contact The Miley Legal Group today for a free case review and let our legal team show you how we can help you and your claim.