Are Car Accident Settlements Taxable?

A personal injury settlement often brings huge relief following a traumatic car crash. The amount can be used to cover lost wages or pay medical bills. Let’s take a look at how the Internal Revenue Service (IRS) views these accident settlements and which portions could be taxable.

Can Car Accident Settlements Be Taxed?

IRS Section 104 offers an exclusion from taxable income related to lawsuits, awards, and settlements. Under the Internal Revenue Code, the majority of personal injury settlements for physical injuries are not taxable.

This will include compensation for any hospital bills, medical treatments, surgeries, and physical therapy. Damages for pain and suffering or emotional distress directly connected to a physical injury are typically excluded from income.

Additionally, if your attorney fees are ultimately deducted from the non-taxable portion of the settlement, these fees are not taxable either.

Lost Income And Other Taxable Amounts

It’s important to note not all compensation is treated the same. For example, if your settlement includes damages for lost wages, this amount is usually taxed. This is due to the fact that the wages would’ve been taxed if they had been earned normally.

Punitive damages is another taxable category. This is awarded typically to punish intentional or reckless actions. While this is rarely done in car accident cases, these damages will be taxed. The same goes for interest that accrues on a settlement in between the time the case is resolved and the payment gets made.

Property damage compensation can be quite complex. If you receive money for vehicle repairs or replacements, the amount is not taxable if it does not exceed your car’s adjusted value. If the reimbursement exceeds the car’s value, however, the excess could be considered taxable.

Non-Economic Damages

Emotional distress creates another gray area in these cases. If the distress stems from a physical injury right after a car crash, it is usually tax-exempt. Compensation for trauma without physical harm can be taxable.

Most claims will combine different kinds of compensation. This can include lost wages, medical bills, emotional distress, and more.

Tax Settlement in Mesa, Arizona

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