Are Car Accident Settlements Taxed?

What Damages are Taxable in My Car Accident Settlement?

After a car accident, victims often suffer physical injuries, financial difficulties, and emotional trauma. When they file a personal injury lawsuit, they seek to recover financial compensation to cover the costs of those obstacles. Car accident victims often file claims to recover compensation for medical bills, lost wages, property damage, and more. The Barnes Firm’s best car accident lawyers in Los Angeles say these damages can be divided into two categories: compensatory and punitive damages.

The compensatory damages in your settlement are to make up for costs that the accident and injury imposed. If you receive punitive damages, those are meant to punish the liable driver for acting with little regard for others’ safety

According to the Internal Revenue Service,

“Generally speaking, most people view the term ‘compensatory’ to mean ‘nontaxable.’ However, the term ‘compensatory’ merely means that the payment compensated the taxpayer for a loss. Thus, determinations of the taxability of lawsuit awards cannot always be made by simply referring to the terminology used — that is, compensatory or punitive.”

Whether your financial award will be taxed after receiving a settlement depends on the type of damages you were awarded. The following details compensation most often considered in a car accident claim, and which are taxable in a settlement:

Tax-Free Damages

• Medical expenses: Damages for medical costs are often a large portion of total settlement awards. You should be compensated for examinations, tests, surgeries, medical treatments, hospital stays, and much more. This compensation is usually tax-free. The only exception is if you took a deduction on your most recent tax return; if you did, the reimbursement in your settlement might be taxed.
• Pain and suffering: Car accident victims often receive compensation for pain and suffering to make up for discomfort and anguish that resulted from the accident. According to the IRS, damages for pain and suffering are usually not taxable.
• Emotional damages: The IRS also excludes emotional damages from being taxed. Emotional damages are meant to repay victims for the emotional suffering they experienced because of the accident, such as emotional distress, PTSD, and depression. Treatment for these conditions falls under medical expenses, so they’re not taxed.
• Property damage: If you receive compensation for your car or other property being damaged in the accident, that money should not be taxable.

Taxable Damages

• Lost wages: If you’re forced to miss work after your car accident while recovering from both physical and emotional injuries, that compensation will be subject to taxes. Regular wages and income are taxed in the U.S. So, any payment you receive for lost wages will also be taxed.
• Punitive damages: Compensation received as punitive damages may be subject to taxes, according to the IRS. That’s because punitive damages are meant to punish the at-fault driver for reckless behavior, not to help the victim recover.

How Do Car Accident Victims Recover Compensation?

Car accident victims in California typically receive insurance benefits and other compensation for their injuries through a:

• Settlement: Damages can be recovered through the at-fault party’s insurer. In an agreement, the insurance company offers a certain amount to cover costs related to the accident and resulting injuries. If you accept the offer for compensation, you’ve consented to a settlement.
• Jury verdict: If a settlement cannot be agreed upon and your injuries are severe, your injury attorney can help you file a lawsuit against the at-fault party to seek damages in court. Often, a jury will decide if the defendant party was responsible, and how much you’re entitled to in damages.
• Bench trial: Outside of a jury verdict, a judge will determine the portion of the at-fault party’s responsibility and how much you should be awarded in damages.

The Los Angeles car accident attorneys at The Barnes Firm will attempt to negotiate a favorable and fair settlement deal with the at-fault party’s insurer in most cases. However, if you’ve suffered substantial injuries and the insurance company is not willing to pay what you deserve for your injuries and trauma, we will fiercely advocate for you in a trial.