If you are a victim of a car accident or have recovered financial compensation for your injuries and damages just recently, you may be wondering about whether you will need to pay taxes on auto settlement or judgment. If it’s any consolation, you are not alone. Many accident victims often wonder about the same.
The taxability of the settlement or judgment varies depending on the situation. The best advice, therefore, would be for you to speak to your lawyer about it. Often, they are in a better place to help you because they understand the nature of your case, and every other aspect surrounding your lawsuit. Since there is no hard and fast rule regarding taxes on car accident settlement, this article shall give you some insights into what you can expect from the process.
Types of settlement
Settlements or judgment often fall into the following categories of compensation
Lost wages – this is what you get as compensation for the earnings you lost for not being able to go to work due to the accident. Generally, any amount you get as lost wages is subject to income tax. The reasoning behind it is that your initial income would have been taxable if you hadn’t suffered the loss – so any monies you get to cover for the lost wages should be taxable too. The same criteria apply to future lost wages, where you are unable to work now or in the future.
Medical payments – This settlement covers the total amount of medical costs that arise due to the accident. It also compensates you for the pain and suffering you go through as well as the lost wages that result directly from your injuries. Under this kind of settlement where you recover finances for your medical expenses and physical injuries, you often will not be taxed, as this payment is designed to reimburse you for the money you spent out of pocket.
General and property damage – general damage accounts for your pain, suffering and the inconveniences – the amount is usually calculated with a multiplier between 1.5 and 5. Property damage compensation takes care of the repairs or replacement of the vehicle involved in the crash. Any financial recovery you obtain from general and property damage arising from a car accident is not subject to tax.
Punitive damages – Although rare, there are times when road accident victims are awarded punitive damages. This settlement is meant to punish the defendant for barring them from future bad behavior. Often, this compensation is awarded when the defendant has engaged in particularly egregious or outrageous conduct. Punitive damages are always taxable.
So basically, the type of settlement you are getting will determine whether or not you are legally needed to pay taxes on them or not. As stated earlier, it is best to talk to your personal injury lawyer. They are in a better place to offer basic information on the taxability of your settlement.