Are Car Accident Settlements Taxable?
Motor Vehicles Accidents - June 8, 2021
Anytime a person is injured in a vehicle accident caused by the careless or negligent actions of another driver, they should be able to recover compensation from the at-fault party. Even though these cases can become incredibly complicated, it is not uncommon for a person to be offered a settlement by the insurance carriers or at-fault driver at some point before the case goes to trial. However, it is important to know whether or not car accident settlements are taxable. We know that taxes are inevitable in just about every aspect of our lives, but is this the case for personal injury settlements?
Most Car Accident Settlement Amounts Are Not Taxable
Without getting too bogged down in regulatory language, we can briefly turn to the US code specifically related to the Internal Revenue Service (IRS) regulations addressing the taxability of settlements. In 26 C.F.R 1, we can see that damages received by an injury victim for personal physical injuries are excluded from taxes. This includes payments made for economic damages such as medical bills as well as emotional distress damages attributable to the physical injuries.
The IRS specifically says that it does not matter whether or not the injury victim is awarded compensation through an insurance settlement or as a result of a jury verdict; they will not be required to pay taxes on these damages.
Additionally, any compensation a person receives as a result of vehicle damage in a car accident will not be taxable. This is true for the costs of repairs as well as any reimbursement that a person receives for a rental vehicle that they need while their vehicle is in the shop.
What About Lost Income Replacement?
Any compensation received for lost income after a vehicle accident occurs will likely be subject to income tax. There is actually a good logic behind why this type of compensation will be taxed. The reasoning is that the original income the person would have earned had they not suffered the injury would have been taxable, so any replacement income from a settlement or jury verdict should be taxed as well.
If a person receives a judgment for car accident compensation that includes other types of losses in addition to lost income, including medical bills and pain and suffering damages, the individual must still pay taxes on the portion of the settlement attributed to the lost wages.
What About Punitive Damages?
In some personal injury cases, punitive damages may be awarded. This category of personal injury damage is intended to do exactly what it sounds like – punish the defendant for their grossly negligent or intentional actions. Additionally, punitive damages are meant to deter the defendant from carrying out the same actions in the future. Punitive damages are only awarded in extraordinary circumstances where the defendant has engaged in particularly egregious behavior.
In the event punitive damages are awarded, these will almost always be taxable by the IRS. Punitive damages are not necessarily meant to compensate the injury victim for their losses, even though they will receive the money.
Work With An Attorney
If you or somebody you care about has been injured due to the careless or negligent actions of another individual, business, or entity, you need to work with a car accident attorney in Chicago for help with your case. An attorney will be able to help you navigate any taxation issues pertaining to your personal injury settlement. In particular, they will make sure that you know which portions of any eventual settlement or jury verdict are taxable and which portions are not.