Are settlements from car accidents taxable?

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Things to Remember...
  • Most settlements or judgments from car accidents are not taxable with the exception those for of lost wages or punitive damages
  • Lost wages is viewed as income which is taxable since you would have earned that money had you not been hurt in a car accident
  • Car accident victims who are being compensated should discuss their settlement and tax implications with their lawyer and tax advisor

If you have recently experienced a car accident or have recently settled a car accident case with another party’s insurance company, you may be wondering about the tax implications of your settlement or judgment.

While this is something you should speak to your attorney and accountant about, the taxability of the settlement depends on the circumstances.

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Lawsuits Surrounding Car Accidents

Although frivolous lawsuits abound, there are still legitimate lawsuits surrounding car accidents.

Each year, thousands of people are killed or injured in car accidents that happened because of another party’s carelessness or inattentiveness.

Even if the injured party has insurance, it may not cover all of their medical or property damages or any of their pain and suffering.

In these types of cases, some people choose to seek compensation through the legal system.

Settlements and Judgments

Settlements and judgments are considered the same under United States tax law. The amount a victim and his lawyer demand from the at-fault party is based on many different factors.

Settlements are usually divided into the following different categories of compensation:

  • Lost wages – If the victim had to miss any work due to the accident and resulting necessary medical care, it falls in this category, even if benefits or PTO were used
  • Future lost wages – If the victim is now unable to work or will continue to be unable to work, future missed wages are accounted for within this category
  • Medical payments – The total amount of medical expenses incurred from the accident that are being paid, even if they are not paid out of the victim’s own pocket
  • Future medical care – If the injuries sustained by the victim will require future or ongoing medical care and treatments, they also have a right to be compensated for them
  • General damage –These damages account for the pain, suffering, and inconveniences to the victim. A multiplier between 1.5 and 5 is generally used to calculate this amount.
  • Property damage – This usually refers to the amount required to repair or replace the vehicle that was involved in the accident.

The type of compensation you are receiving will determine whether or not you are legally required to pay taxes on them.

However, any money received as a result of lost wages or any punitive damages received will count as taxable income.

You should speak with your lawyer and tax advisor for more information about paying taxes on your specific settlement.

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How is the multiplier determined?

While most victim’s attorneys will recommend a multiplier of 4 or 5, opposing counsel may suggest a two or three.

However, there are cases where a multiplier of greater than 5 should be used.

Examples of these circumstances can include:

  • The other party’s fault is obvious and nearly total
  • The injuries of the victim are obvious
  • The injuries are painful and severe, requiring surgical treatment or on-going care
  • Recovery time is at least 6 months or longer
  • Medically documented permanent consequences exist, such as chronic pain, immobility, scarring, disfigurement, or weakness

Paying Taxes on a Car Accident Settlement

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In most cases, you will not be required to pay federal or state taxes on your car accident settlement or judgment.

For tax purposes, money from a settlement or a court judgment is viewed the same. Tax laws apply as follows:

  • Monies Received for Medical Expenses and Injuries – Generally, these expenses are grouped into a lump sum and compensate the victim for several different categories known as compensatory and general damages. These are not considered to be income under U.S. tax code since it is meant as a reimbursement for expenses you have already paid.
  • Money for Auto or Property Damage – Money received by accident victims for the purpose of compensating them for the loss or repairs made to their car or other physical property is also not taxable.
  • Lost Income Compensation – If your settlement included compensation for many different types of losses, as well as lost income, you must calculate the portion for lost income and count that as income on your income taxes.

Although rare, some victims will receive what is known as punitive damages which are reserved for cases where the defendant acted out intentionally or outrageously in causing the accident.

In the rare event that you receive punitive damages, you will be required by U.S. tax code to pay income taxes on them.

Not paying taxes on monies that should be included in your annual tax filing can have serious consequences.

Drivers can also save money by using an insurance premium comparison calculator online when shopping for car insurance.

Start comparing car insurance rates now by entering your zip code in our FREE tool below!

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