Do You Have to Pay Taxes on a Car Accident Settlement Check?

Do You Have to Pay Taxes on a Car Accident Settlement Check?

There are plenty of factors to consider when it comes to a personal injury settlement. When you agree to a settlement, it is important to ensure the amount you recover will meet your financial needs. This includes understanding the settlement funds that could be available after your tax bill is due.  

While taxes might not be at the forefront of your mind when you take on a personal injury claim, the reality is that portions of your recovery could be taxable. The failure to pay these taxes could have steep ramifications.  

The good news is that a large portion of most personal injury settlements is tax-exempt. Despite this, it is vital that you understand which parts of your settlement might not be. A Los Angeles personal injury lawyer could assist you with these tax implications prior to negotiating a settlement.  

Compensation that is tax-exempt 

The general rule is that any monetary award designed to compensate you for your physical injuries is not taxable. One of the primary types of compensation available with an injury claim is the cost of medical care. Any compensation for your medical bills will not be taxable, with one exception. If you paid out of pocket for your medical costs in the previous year and have already deducted them from your taxes, you cannot deduct them a second time.  

The story is the same for workers’ compensation benefits. Any benefits paid through the state workers’ compensation system is not taxable if it relates to a work-related injury or illness.  

While compensation for your physical injuries is rarely taxable, damages for your emotional injuries might not be exempt. The determining factor is again whether or not the harm stems from a physical injury. A person that suffers emotional distress or mental anguish based on a physical injury will not have to pay taxes on that compensation. That said, these emotional damages could be taxable if they result from something other than a physical injury. This is a complex issue best explained in detail by Los Angeles car accident attorneys.  

In addition to compensation related to your bodily injuries, the damages stemming from damage to your personal property are also usually exempt. This primarily entails compensation for the cost of repairing or replacing your motor vehicle after a crash.  

Compensation that could be taxable 

One type of compensation that could be taxable is lost wages. If these damages occur as a result of your physical injury, they are tax exempt. However, if you are eventually able to return to work in a limited capacity you may have to pay taxes on that portion of your income.  

Punitive damages are routinely taxable. Unlike most forms of monetary awards, punitive damages are not intended to compensate you for your losses. Instead, these damages are designed to punish the defendant for egregious conduct. Since these losses do not directly stem from physical injuries, they are taxable income.  

In some cases where a defendant lacks the ability to pay the full settlement right away, a court could order them to pay interest on a judgment. You must pay taxes on any interest payments you receive even if the judgment itself is related to your injuries.  

Most personal injury claims are pursued under the legal theory of negligence. This theory involves a claim that the defendant failed to act in a reasonable manner to avoid causing your harm. In some cases, however, a plaintiff could pursue an injury case based on the breach of a contract. In these cases, income could be taxable.  

How an attorney might help 

As you can see, it is not always clear when taxes might be due for a car accident settlement. Given the risks involved, it is not in your best interest to assume you will not have any tax obligations. To ensure you recover the compensation that will meet your needs after your tax bill is paid, your best bet could be working with a personal injury lawyer.  

At Ellis Injury Law, our team of attorneys can guide you on identifying whether a settlement offer is fair or not. To learn more about your legal options, set up a free consultation today.