The question comes up frequently, usually at the end of the process. You’ve been in a car accident. You have managed to reach a settlement with the insurance company of the driver at fault, or you’ve emerged victorious at trial, with a verdict in your favor. Time to put the whole ordeal in the rear-view mirror — but wait. Do you have to pay taxes on the money you’ve just received? As with most tax issues, the simple answer to that simple question is, “It depends.” The types of compensation involved in an auto insurance settlement vary; some aspects are not subject to taxation, while others are. With tax filing deadlines approaching, it’s a good time to review the general guidelines and know what kind of tax hit, if any, to expect from settling a claim after an accident.
PAYMENT FOR INJURIES AND PROPERTY DAMAGE: TAX FREE?
Let’s start with the simple part. The amounts paid to you as a result of physical injuries you’ve suffered or for damage to your vehicle are, in most cases, not taxable. They are reimbursement for losses you have incurred and thus would not be reported as income. According to the relevant federal regulations, this applies to settlement payments for medical bills as well as any award for pain and suffering that you endured as a direct result of physical injury. The exception would be if you already claimed a deduction for your medical expenses on your tax return; if that’s the case, you may be required to report that part of the settlement as income.
WHAT ABOUT LOST INCOME?
If the accident caused you to lose time from work, the settlement may include reimbursement for lost wages. Since wages are income, that amount is taxable.
OTHER POTENTIAL TAX ISSUES
The settlements in most car accident cases tend to revolve around lost income (taxable) and payments for physical injuries and property damage (not taxable). Simple, right? But other types of compensation may be involved that can create additional tax liabilities. In rare cases, juries may award punitive damages, intended to punish the defendant for intentional misconduct; those damages are considered taxable. So is any award for “emotional distress” that isn’t a direct result of the physical injuries involved. So is interest paid on the amount of the settlement. There are deductions you may be able to take to offset some of these taxes —for example, deducting attorneys’ fees and other costs that reduced the amount you ultimately received. The more complex the settlement, the more likely you are to need an experienced tax advisor to help sort through what is taxable and what isn’t, and to address your questions about what to do with that settlement check once it arrives.
THE CAR ACCIDENT ATTORNEYS AT FDAZAR
For more than thirty years the attorneys at Franklin D. Azar & Associates have helped thousands of injured people obtain complete and timely compensation for their losses. Our proven track record and expertise have allowed us to grow into the largest personal-injury law firm in Colorado, with offices in Denver, Greenwood Village, Colorado Springs, and Pueblo. If you’ve been injured in a bus, car, truck, or motorcycle accident, you may be entitled to compensation. Please call the car accident attorneys at FDAzar day or night at 720-372-2824 or contact us here for a free consultation and no-obligation evaluation of your case.