Securing an auto accident settlement can be a notable victory for the survivors of traffic accidents. As these settlements are being worked out, however, understanding what elements may be subject to taxes can integral to helping victims work out agreements that may limit their future tax obligations and, in doing so, help them retain as much of their settlement as possible.
Nontaxable Portions of Auto Accident Settlements
According to the IRS, settlements for physical personal injuries or physical illnesses will not be subject to taxes as long as the recipients “did not take an itemized deduction for medical expenses related to the injury or sickness in prior years.” In other words, these portions of settlement proceeds will not be counted as “income” for federal tax purposes.
Specifically, this can mean that the following portions of car accident settlements are usually not taxable:
- Damages for medical bills – This can include any emergency medical care you received, as well as the follow-up medical treatment you have had since the accident. If you require future treatments and are awarded damages to cover these costs, those aspects of your award will also typically not be taxable (as long as you have not already taken deductions for this care).
- Damages for emotional distress related to a physical injury – When physical injuries caused by a car accident also cause mental suffering, these aspects of settlements are also typically not subject to taxes.
- Compensation for property damage – In a car accident settlement, this will include the awards for your vehicle repair costs or for totaled vehicles.
Taxable Portions of Auto Accident Settlements
Elements of personal injury settlements that can be taxed can include (but may not be limited to):
- Damages for emotional distress not related to physical injuries – This situation can arise in less serious car accident cases when the crash may not have resulted in any physical injuries but it did result in mental distress or suffering. When emotional distress is not related to some physical injury, the damages for it will usually be taxable.
- Damages for lost wages – This includes damages for past and future lost wages, both of which will be taxable because those wages (had they been earned through the victim’s labor) would also have been subject to federal taxes.
- Punitive damages – Not part of all auto accident settlements, punitive damages will also be taxable when they are awarded.
Car Accident Settlements & Tax Liabilities: More Important Info
If you have been offered a settlement, be sure to consult with an attorney before accepting the offer to make sure that the terms of the offer won’t subject you to unnecessary, expensive tax burdens.
Although elements of your settlement may be taxable, you may be able to make some deductions for these portions. For instance, you may be able to deduct the costs of therapy from your tax obligations for the damages for emotional distress.
Contact a Louisville Auto Accident Attorney at Murphy & Associates, PLC
Have you been injured in a traffic accident? If so, you can get experienced help pursuing compensation and justice by contacting a trusted Louisville auto accident attorney at Murphy & Associates, PLC.
Call us at (502) 203-0167 or email us using the contact form on this page to schedule a free, no obligations initial consult with one of our lawyers.
We welcome your call or email from anywhere in Kentucky, Indiana, or elsewhere throughout the Midwest or South. All case evaluations are free, and most representations are taken on a contingency fee basis, which means you pay us nothing unless we succeed in recovering money on your behalf.