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Are Car Accident Settlements Taxable?

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If you pursued legal action after your motor vehicle accident and secured monetary damages for the losses and injuries you sustained, you may wonder, are car accident settlements taxable? Unfortunately, the answer to this question will depend on numerous factors, including the type of damages you obtained and how these damages were classified. That is why if you were injured in a car accident, the law firm of Steelman Gaunt Crowley can help you not only evaluate your legal options following this devastating crash but go over in detail how car accident settlements are taxed. For further information regarding these issues, schedule your free consultation by calling our office at (573) 341.8336.

Financial Damages for Physical Injuries

The Internal Revenue Service (IRS) indicates that settlements for physical sickness or personal injuries are not subject to income taxes. This means that if you endured harm because of a motor vehicle collision due to another person’s negligent, reckless, or intentional actions, a settlement awarded to compensate you for your injuries will not be taxed. Money from personal injury cases is not typically considered income since the money was not the fruits of your labor. Instead, this compensation is meant to pay you back for the losses you endured because of the car crash.

If you deducted medical expenses due to the accident from previous tax returns, however, you would need to include the portion of the settlement that reimburses you for those medical costs as income. Moreover, if the insurance covered any of these medical expenses, they may be able to place a lien on your settlement.

Financial Damages for Mental Anguish or Emotional Distress

In terms of financial damages related to emotional distress and mental anguish, these damages are handled the same way as monetary relief for physical injuries. This means that in many cases you do not need to include the settlement proceeds for these damages on your income tax return.

However, the mental anguish or emotional distress did not result from a physical injury or sickness, then this portion of the settlement proceeds will be taxable. However, the amount that must be reported as income will depend on the circumstances.

Financial Damages for Motor Vehicle Repairs

If you obtain compensation for vehicle damage due to a motor vehicle accident, this compensation is not taxable. The same rule also applies to repair costs that were paid out, as well as any reimbursement you received for a rental vehicle while your automobile was in the repair shop.

Punitive Damages

In a motor vehicle accident case, IRC Section 104(c)  indicates that punitive damages awarded will generally be subject to income tax and must be reported on an annual tax return. The reason for this is that these damages are not designed to compensate a victim for their losses after an accident. Rather, they are awarded by the court to punish the wrongful party for their egregious actions and willful disregard for human life or safety. That is why these monetary damages are considered taxable income.

Some lawyers may ask the court to separate a verdict into compensatory damages and punitive damages, so it will be easier to demonstrate to the IRS the portion of the award that is not taxable and which part is. For further information regarding punitive damages, consider reaching out to Steelman Gaunt Crowley to review these issues and to find out: Are car accident settlements taxable?

Interest Accrued

Depending on the situation, some car accident cases can take a long time to resolve, which means that interest can accrue on what is owed. In these instances, the interest that is earned is taxable.

Financial Damages for Lost Income

Compensation for the loss of income could be taxable depending on the situation. The reason for this is that your original income would have been taxed had you not suffered income losses. Consequently, the compensation intended to replace this lost income should also be taxed.

Settlement and Judgments: Are They Treated the Same Under the Tax Laws?

When purposes of determining tax liability, out-of-court car accident settlements and money awarded after a trial are treated the same. This means the IRS will consider the settlement or judgment taxable income unless the damages fall within specific guidelines as indicated above.

How Much of a Settlement Award Is Allocated for Each Category of Damages?

After you receive a settlement award, it is important to break down the different portions of it since they each may receive a different tax treatment. Working with an experienced car accident attorney can help you handle this part since an attorney can provide a full breakdown of your damages and figure out which damages are allocated to which claim.

How Much Does the IRS Tax Car Accident Settlements? 

Depending on the case and the compensation obtained, a portion of the settlement may be taxed as income. Yet, how much the IRS will take will depend on numerous factors. Prominent among these are your tax bracket and the origin of the claim. 

Settlements and judgments are not subject to a special tax rate, which means they will be taxed like ordinary income. However, it is important to add that the IRS will take the entire amount that was initially awarded into consideration. Discussing these issues with an experienced car accident attorney or tax professional can help you better understand how much the IRS is likely to collect following a motor vehicle accident settlement.

Contact Steelman Gaunt Crowley for More Information Regarding Car Accident Settlements and Taxes

Dealing with taxes after a settlement can get complicated, especially as the laws governing the taxation of injury settlements are constantly evolving. If you have questions regarding car accident settlement and income taxes, consider discussing the matter with the experienced Missouri legal team at Steelman Gaunt Crowley. Our skilled car accident attorneys can help you better understand not only how the tax system works when it comes to your settlement or judgment, but we can also figure out what this can mean for your compensation going forward. Do not wait any longer to get your questions answered. Contact the Missouri accident attorneys at Steelman Gaunt Crowley at (573) 341.8336 and find out: Are car accident settlements taxable?