When you reach the settlement stage of your car accident claim and receive your compensation, you will probably feel a sense of relief—thankful that this part of the ordeal is finally over. However, there is one more issue that you need to consider: whether you owe income taxes on your settlement. Unfortunately, this can be more complicated than you might expect.
Do You Have to Pay Taxes on Your Auto Crash Settlement?
If you are like many accident victims, you were most likely entitled to and received compensation for your medical bills, lost wages, property damages, and pain and suffering in your settlement or award at trial. It is important to know how much of your settlement was for each type of damage since this will impact on whether or not you owe income taxes. Here is how the taxability of each type of damages works:
- Medical expenses. You generally will not owe any income taxes on the medical expenses portion of your settlement. However, if you took a deduction for medical expenses on a prior tax return, that portion that was reimbursed to you in your settlement is most likely taxable.
- Lost wages. Your lost wages proceeds are paid to you to reimburse you for wages that you lost or will lose due to your injuries. Like your wages, the lost wages portion of your claim is taxable.
- Pain and suffering. It is more complicated to determine if you owe taxes on compensation for your pain and suffering. The portion you receive for your pain and suffering is not taxed, but the amount for your emotional distress would be taxable. In many cases, the pain and suffering and emotional distress damages are lumped together under pain and suffering, which may mean that you don’t owe any taxes.
- Property damages. You are not taxed on the proceeds that you receive to reimburse you for the costs to repair or replace your vehicle or property in it and rent a car while yours is in the shop.
- Punitive damages. Punitive damages are only awarded when the negligent driver’s actions are especially outrageous. If you do receive punitive damages, they are taxable.
If you were injured in a car accident, you need the assistance of an experienced car accident attorney to negotiate your settlement so that you receive what you deserve. To learn about our extensive experience fighting for the rights of car accident victims and how we can assist you, call our Norfolk office today to schedule a free consultation.