Do I Have to Pay Taxes on My Car Accident Settlement?

Do I Have to Pay Taxes on My Car Accident Settlement?

A Phoenix car accident lawyer explains when auto crash settlements are taxable.

A Phoenix car accident lawyer explains when auto crash settlements are taxable.

Possibly; it will depend what types of damages you have been awarded as part of your settlement and whether you have taken deductions for medical-related expenses in the past.

Taxable Portions of Car Accident Settlements

In general, the aspects of car accident settlements that you will have to pay federal taxes on include (but may not be limited to) awards for:

  • Lost wages – Both back wages and future lost wages can be taxed because these earnings would have been taxed by the federal government had you earned them via your labor (rather than via a settlement).
  • Emotional suffering not related to a specific physical injury – In other words, awards for generic mental suffering not directly tied to a car accident injury will also be subject to federal taxes.
  • Punitive damages – These damages are not available as part of every car accident settlement; when they are, however, punitive damages, which are awarded to punish some negligent party (instead of solely compensating the victim for his or her losses), are also taxable.

Nontaxable Portions of Car Accident Settlements

Damages for car accident settlements that are not usually taxed by the IRS include (but may not be exclusive to) awards for:

  • Medical care related to the physical injury – The costs of emergency treatments, surgeries, and any necessary ongoing medical care to recover from car accident injuries will not generally be taxable as long as the individual has not already taken tax deductions for these costs on prior tax returns.
  • Emotional distress associated with a physical injury – When awards for emotional distress are tied directly to some car accident injury, these awards will also not be subject to federal taxes.
  • Property damage – This can include the costs of vehicle repairs or replacement (if the crash totaled the car).

Car Accident Settlements & Tax Obligations: What You Should Know

  • For the portions of car accident settlements that are taxable, you may still be able to take advantage of some tax deductions. For instance, for emotional suffering unrelated to a physical injury, it may be possible to deduct the costs of therapy from your tax obligations.
  • If you are offered a settlement by an insurer (or another party) following a car accident, be sure to consult with an attorney before you accept or turn down the offer. A lawyer can help you understand whether the settlement is fair and/or whether there may be better ways to structure the settlement in order to minimize your future tax obligations.

Contact a Phoenix Car Accident Lawyer at the Law Office of Richard Langerman

Have you or a loved one been hurt in a traffic crash? If so, a Phoenix car accident lawyer at the Law Office of Richard Langerman is here for you, ready to fight for your rights to compensation and justice.

To set up a free, no obligations initial consult with a Phoenix personal injury lawyer, call us today at (602) 240-5525 or send us an email using the contact form at the bottom of this page. From our offices in Phoenix, we provide superior legal services and representation to clients throughout the state of Arizona.

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