CAR ACCIDENT SETTLEMENT

When I settle your car accident case and you receive your money after paying medical expenses and any liens, including my 1/3 fee, are your net proceeds taxable? That is a very important question as we all want to keep as much money in our pockets as possible and avoid taxes if we can. It is not that you are not patriotic but that you just went through hell with your injuries and want to keep as much money as you can for future medical expenses as well as all the stress and distress of going through a major trauma like a car crash or car accident.

Is a Personal Injury or Car Accident Settlement taxable?

In most cases, you can keep your car wreck settlement money all to yourself and will not have to pay taxes. The idea is that you are being compensated for your personal injuries, emotional distress, pain and suffering, past and future medical expenses, etc. These should not be taxable if you lost these things due to the negligence of another vehicle driver.

 

However, the IRS does impose taxes on certain things in a personal injury settlement or jury award:

1. Deducted Medical Expenses. You will have to pay taxes on medical expenses if you paid for more than one year and took deductions on your previous year’s taxes. So you would have had to have deducted those expenses when you filed your previous year’s tax returns. Typically, you would pay pro rata taxes on those deducted medical expenses.

2. Non-economic damages. A car accident victim is normally compensated by receiving a settlement or jury award for economic damages like your medical bills or your lost wages. Non-economic damages are damages the jury awards for pain and suffering, emotional distress, loss of enjoyment of life, etc. You will not owe taxes on non-economic damages either if you suffered a personal injury and most people do suffer a personal injury in a car accident and thus seek help from a personal injury attorney. But, in a case scenario like a person witnesses a graphic car crash and then seeks non-economic damages for that, then in that particular situation, that person would have to pay taxes on his or her non-economic damages like emotional distress damages or pain and suffering damages.

3. Lost wages. With regard to recovering specific money for your lost wages, you would have to pay taxes on that award due to social security and/or Medicare you would have paid if you had earned them at your job.

4. Excess property damage. This is not really personal injury or bodily injury damages anyway but if you recover more than the value of the damage to your car for example, then you would have to pay taxes on that excess. You would report it as regular income on your tax returns.

5. Punitive Damages. If you recover punitive damages from a jury award, then those particular damages would be taxable, but only the part of the damages award that is considered punitive damages. Punitive damages are legal compensation that a defendant would pay you if found legally grossly negligent or intentional actions that the defendant was found guilty of. What Are Punitive Damages? Purpose, Cap, Calculation, and Example

Cited source: https://www.investopedia.com/terms/p/punitive-damages.asp#:~:text=Punitive%20damages%20are%20legal%20recompense,considered%20grossly%20negligent%20or%20intentional.



Thus, there are many facets to understanding a settlement or jury award in a car accident case. I can advise you on the best way to categorize your damages so they are not taxable or help you with regard to the taxable amount if you fall under one of the rare exceptions to non-taxable income from car wreck settlements or jury verdicts. I can help you structure your settlement to minimize your tax liability, if any. Together we can structure the award or settlement to take advantage of favorable tax laws and loopholes.