When you’re involved in a bad car crash, there’s plenty to worry about besides tax issues. It’s usually late in the process after we have helped our clients to reach a settlement with the insurance company or emerge victorious at trial, that they start asking questions about how their personal injury settlement might affect their tax situation. With tax season around the corner, here are some common questions and straight answers.
DO I HAVE TO PAY TAXES ON MY PERSONAL INJURY SETTLEMENT?
As with most tax issues, the simple answer to that 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. 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. The IRS has consistently held that compensatory damages, including lost wages, received on account of a personal physical injury are excludable from gross income and thus are not taxable.
ARE OTHER FORMS OF COMPENSATION TAXED?
The settlements in most car accident cases tend to revolve around lost income and payments for physical injuries and property damage (not taxable). But other types of compensation may be involved that can create 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.
WHAT CAN I DO TO REDUCE MY TAX LIABILITY?
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, Aurora, Thornton, Grand Junction, Greeley, Fort Collins, 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 800-716-9032 or contact us here for a free consultation and no-obligation evaluation of your case.