Do I Have to Pay Taxes on Car Accident Settlement?

If you have received a monetary settlement from a car accident, you might be surprised to learn that some of that settlement could be taxable by the federal government or the State of California. The good news is that most injury accident compensation is not compensable. The bad news is that certain types of damages are. The consequences of failing to pay taxes are steep, which means it is vital that you understand your tax liability before you agree to a settlement.  

Thankfully, an experienced Los Angeles car accident lawyer can guide you on these taxation issues. With the right attorney, you can go into settlement negotiations with a complete understanding of your potential tax liability once the settlement is complete.  

When injury settlements are exempt from taxation 

For the most part, settlements resulting from a personal injury lawsuit are not taxable on the state or federal level. After all, any settlement for an injury is designed to make you whole not turn a profit. If the state took part of your damages earmarked for your medical bills you will be left paying some of them out of pocket.  

The compensation that is exempt from taxation goes beyond your medical bills, however. If you recover non-economic damages for your pain and suffering or loss of consortium, that settlement money is also exempt. During settlement negotiations, your Los Angeles car accident lawyers can advise you of your potential tax liability.  

When taxes apply 

Like with most areas of the law, there are important exceptions to understand when it comes to taxable settlements. The first exemption you should be aware of is compensation for your lost wages. If you miss work due to an injury, you could recover those lost paychecks through an injury claim. Because you would have otherwise been taxed on your normal wages, the government will tax your lost wage compensation as well.  

In cases that stretch on for years, it is possible that you could have accrued significant medical expenses. If you claimed those expenses as itemized tax deductions in previous years, you would be required to pay taxes on your settlement money now. Otherwise, you would essentially be double-dipping.  

It is also worth noting that only the proceeds from a negligence claim are exempt. If your lawsuit includes elements of a breach of contract claim as well, the proceeds from that claim would be taxable. Ultimately, only compensation that results directly from your injuries will be tax-exempt.  

Another form of compensation that is not tax-exempt is punitive damages. These damages are designed to punish the defendant for their egregious behavior, not help you recoup losses caused by your injuries. Because they are not directly related to your injuries, you can expect to pay taxes on any award of punitive damages you might recover. These damages are fairly rare in personal injury claims regardless.  

Finally, judgments that are not immediately satisfied by the defendant or their insurance company can begin to accrue post-judgment interest. By charging interest on these judgments, the courts prevent a defendant from treating the judgment as an interest-free loan. However, while the proceeds of your injury claim are exempt, any interest that accrues on that judgment is not.  

How an attorney can help 

To ensure you avoid unnecessary tax consequences, it is vital that you consider the tax implications of your injury claim prior to reaching a settlement. At Ellis Injury Law, we are experienced in negotiating these claims and can advise you on how to get the most from your case. Contact the Los Angeles car accident attorneys of Ellis Injury Law right away to schedule your free consultation.