If you got a settlement or judgment due to a car accident, you might think, “Do I have to pay taxes on that money?” The taxable nature of your vehicle accident settlement or court judgment is determined by the type of loss paid. Consulting a personal injury lawyer near me can help answer this.
Judgment and settlement – are they the same?
What you should know is whether you received an out-of-court settlement for the car accident – that is, a settlement from an insurance company for your vehicle – after your vehicle collision or were granted money from a civil court after trial – that is, you received a judgment in your favor – the same tax rules usually apply.
Remember that there are state and federal income tax rules and regulations to consider. Regarding the taxability of personal injury settlements and judgments, most states have established laws that are the same or comparable to the concerned CFR section.
Injury compensation is not taxable.
Most settlements and verdicts only provide for “general damages” and “compensatory damages.” These damages are intended to compensate you for your medical expenditures, lost earnings, and pain and suffering caused by your injuries.
A typical settlement where you get solely compensatory and general damages for your physical injuries and medical expenditures is often tax-free.
Vehicle damage compensation is not taxable.
Compensation for vehicle damage sustained in an automobile accident is not taxable. This is true for any paid repair charges and compensation you may have received for a rental car while your vehicle was in the shop.
Lost income compensation is taxable.
Generally, any judgment or settlement amount you get as compensation for lost income is taxable. Because your initial income would have been taxable had you not incurred the income loss, any compensation designed to replace that same lost income should also be taxed.
Assume your verdict or settlement includes compensation for non-wage damages, such as medical expenses, in addition to lost earnings. In that case, you must still pay taxes on the settlement percentage or judgment related to lost wages.
Punitive damages are taxable, although rare.
Punitive damages are seldom included in an automobile accident settlement or verdict. This type of personal injury damage is typically meant to do exactly what the term implies: punish the perpetrator and discourage future bad behavior. These damages are usually only granted in extreme cases where the defendant has engaged in outrageous or heinous behavior. If you get punitive damages in a personal injury case, they are virtually always taxable.