While clients are waiting to find out what insurance companies will pay after a car accident, their focus is usually just on getting to that point. They might need medical treatment that takes a large portion of their time. Plus, they might be dealing with chronic or recurring pain that makes daily activities challenging or impossible. There’s uncertainty about how much (or even if) settlement they will receive.
Once parties come to an agreement, suddenly they come to a realization. Almost every time they’ve received a check in the past, pretty soon after that they had to give some away to Uncle Sam. That’s why one of the most common questions we get is, “Do I have to pay taxes on my car wreck settlement?”
Tax Liability in Most Situations
We’re attorneys, not accountants. This isn’t advice on how you should pay your taxes. Everyone’s situation is different and laws change, so make sure you talk to a tax professional before you plan how you’ll use your car wreck settlement.
However, that being said, you’ll be relieved to know in most situations you won’t have to pay taxes on your car accident settlement. Your settlement isn’t considered income in the same way as your paycheck, inheritance or lottery winnings. These parts of a personal injury settlement aren’t usually subject to taxation:
- Compensation for physical injuries like medical expenses or medical liens
- Lost wages
- Pain and suffering compensation
- Loss of consortium
- Compensation for emotional distress caused by your injury
This applies both to the amount an insurance company pays and any additional damages the court awards in your case.
But There Are Exceptions
Let’s say you were injured in 2019 and spent a considerable amount on medical treatment. You were still working through your personal injury claim when it came time to file taxes. You claimed your medical expenses as a tax deduction and received credit. If that’s the case, when you receive a settlement you’ll probably be required to pay taxes on that portion.
Sometimes emotional distress claims can get tricky. If you get hurt and it causes you emotional distress, your settlement is tax-free. However, if you didn’t receive an actual injury and your claim is based solely on emotional distress, you might have to pay taxes. This type of thing is rare in a car wreck – most drivers don’t expect to be compensated if no injury occurred.
Who You Should Talk to First
We’re not tax professionals, but we’ve been helping clients pursue large settlements for decades. We have a lot of experience when it comes to car accident settlements and tax liability, knowledge based on real-life situations. If you’ve received a settlement, talk to your accountant about your potential liability. But if you’re just beginning to work toward filing a personal injury claim for your car wreck, we can help answer all your related questions. Schedule your free consultation online today.