The liability of your car accident settlement or a court ruling depends on the type of loss being compensated.
If you have received a determination or judgment after a vehicle accident, you are probably wondering, “Do I have to pay taxes on that money?” Here are some brief answers; Read on for in-depth information:
- Usually, you don’t need to pay tax on a car accident settlement intended to compensate you for your personal injuries or “pain and suffering”.
- The money you receive to fix or replace your vehicle is also generally not taxable.
- It is important to speak with a tax professional if there are any gray areas or if you have specific questions or concerns.
Settlement or Judgment? They have the same thing with Uncle Sam
The first thing to understand is that the same tax rules generally apply whether you received an out-of-court auto accident settlement (i.e. settlement from your auto insurance company) after your auto accident. , or you later received money from a civil court. adjudication (in other words, you have received a judgment in your favor).
IRS Rules for Taxation of Payments and Judgments
The applicable language of the Internal Revenue Service (IRS) regulation addressing the question of taxability of finalizations and rulings is found at 26 CFR part 1.104-1(c):
Damage received as a result of personal physical injury or illness— (1) In general. Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether under petition or agreement and whether in lump sum or under recurring payments) due to personal injury or illness. Emotional distress is not considered a physical injury or physical illness. However, damages for emotional distress resulting from physical injury or physical illness are not included in income under section 104(a)(2). Section 104(a)(2) also excludes damages not exceeding the amount payable for medical care (described in section 213(d)(1)(A) or (B)) due to pain. mental suffering.
Remember that there are federal and state income tax laws and regulations. Most states have adopted the same or similar rules as the CFR section referenced above when it comes to tax liability for personal injury settlements and judgments.
Non-taxable disability compensation
Most settlements and judgments are only for “compensatory damages” and “general damages”. Those types of damages are intended to compensate you for medical expenses, lost wages, and pain and suffering that arise directly from your injury.
In a conventional settlement, where you only get compensation and general damages for your injuries and medical expenses, most of that money is usually not taxable.
The amount of compensation for damage to the vehicle is not taxable
Any compensation you receive for vehicle damage caused by a car accident is tax-free. This is true for repair costs already paid as well as any reimbursement you may have received for a rental car while your vehicle was in the repair shop.
Lost income compensation may be taxable
In general, any payment or judgment you receive as compensation for lost income is subject to income tax. The reason is that your original income would be taxable if you had not lost it, so any compensation intended to replace that same lost income is also taxable.
If your settlement or judgment includes compensation for other types of loss than lost wages, such as medical bills, you will still have to pay tax on that portion of the settlement or judgment relating to lost wages.
Punishment damage is rare, but they are taxable
Rarely, punitive damages are included as part of a judgment or settlement of a car accident. This type of personal injury damage is usually intended as the name suggests — to punish the accused and to prevent future bad behavior. These types of damages are awarded only in fairly exceptional cases where the defendant has committed particularly outrageous or egregious conduct. In some rare cases, even if you receive punitive damages in a personal injury case, know that those damages are almost always taxable.
If you have questions about your tax and auto accident case
Your car accident attorney should be able to provide background information about the taxability of your settlement or judgment. But it’s important to remember that most personal injury attorneys are not experts in tax law. So, if you have more complex questions about the tax impact of a personal injury settlement or judgment, it’s best to get the right advice from a tax professional.
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