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Are Auto Accident Insurance Settlements Taxable?

Posted on September 11, 2020 in Car Accident,Personal Injury

Receiving an insurance settlement check for an auto accident can give you the relief, financial stability and peace of mind you need to finally move forward. Your check can cover expensive medical costs, lost wages, vehicle repairs and more. Come tax time, however, you may face another challenge: determining whether or not you need to pay taxes on your settlement.

Are Car Accident Settlements Taxable?

Yes and no. While an auto accident insurance settlement will not be taxable in general, some parts of it may be subject to taxation. The Internal Revenue Service (IRS) has a tax law in place (26 C.F.R. 1) that protects accident victims from owing taxes on the majority of their injury settlements. There are exceptions to the general tax law, however.

The most common exception is if you deducted the money you spent in medical care in the tax year you had to pay for injury treatment. If you listed your accident-related medical expenses as a deduction on a previous tax year, you must pay taxes on your settlement now. The IRS does not allow crash victims to avoid taxes on the same medical treatment twice. If you did not list your medical expenses as an itemized tax deduction, the full amount of your medical settlement will be nontaxable.

Another exception is if you brought a lawsuit for emotional distress or pain and suffering only. If you lost a loved one in a car accident, for example, but were not injured in the wreck yourself, you could be eligible for a settlement for only your emotional damages or mental anguish. This type of settlement is subject to taxation. The IRS will not tax pain and suffering damages, however, if they are connected to physical personal injuries from the crash.

A settlement to cover your lost wages will be taxable, in most cases, as the amount recovered will not have your income taxes already removed. You will receive an amount that matches your average gross wages before taxes. Since you would have had to pay taxes had you gone to work, you will have to pay the same taxes on that portion of a settlement. Punitive damages and any interest accrued will also be taxable. If you need help figuring out which parts of your settlement are taxable vs. nontaxable, contact a Las Vegas accident attorney.

How Can a Lawyer Help You With Settlement Taxation?

Whether you need to pay taxes on an auto accident settlement depends on the situation. Only a tax professional can give you tax advice. A lawyer, however, can help you organize your settlement and understand taxation before you even receive your settlement check. Once your lawyer negotiates an insurance settlement or personal injury lawsuit, he or she can request a breakdown of how much the judge is awarding in compensatory damages versus punitive damages. Your lawyer will ask for a copy of the jury verdict that clearly categorizes each award for you.

Having a lawyer classify your damages in a settlement agreement can make it easier to pay your taxes. You can easily distinguish the amount you received in medical expense recovery, for example, from your punitive damages. If you received $100,000 in compensatory damages and an additional $20,000 in punitive damages, you would not pay taxes on the $100,000. You would have to pay on the $20,000 in punitive damages.

Having an experienced Las Vegas injury attorney organize your settlement could save you time and money on a tax return. You can take a copy of your categorized insurance settlement agreement to your tax professional, who will enter it on your return for you according to Rule 26 C.F.R. 1. Handling your claim by yourself, on the other hand, could lead to common mistakes such as lumping different awards together on your agreement. This could put you at risk of paying taxes when you do not need to or being in arrears with the IRS. Work with a car accident attorney for the easiest settlement taxation process.

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