In general, car accident settlements are not taxed by IRS. This is because most people receive their proceeds in a lump sum payment that doesn't delineate what it's for.

However, there are circumstances when you could owe income taxes on a settlement or jury award.

When Could You Owe Taxes on Your Settlement or Judgment?

When a negligent driver causes your car accident, you're entitled to compensation for your medical bills, property damage, lost wages, and pain and suffering. IRS regulations provide that you won't owe taxes on damages received in a settlement or award if they're to compensate you for personal physical injuries or illness. When you receive a lump sum settlement that doesn't itemize the damages, it will most likely be treated as compensation for physical injuries and not taxed by IRS.

Paying taxes on car accident settlements Kansas City Accident Injury AttorneysEven if the amount is itemized in your settlement or jury award, some of it won't be taxable. For example, you won't owe taxes on the amounts paid to reimburse you for medical bills or property damage.

However, it can be complicated if you receive compensation for other types of damages. Here's what you should know:

  • Lost wages. This portion of your settlement will most likely be taxed just like income, similar to how taxes are deducted from your paycheck when you're working.
  • Pain and suffering. If you receive pain and suffering compensation due to your physical injuries, it shouldn't be taxable. However, if you suffered psychological injuries, such as depression, anxiety, or PTSD, they're not considered physical injuries. If itemized as such in your settlement, these damages could be considered taxable.
  • Punitive damages. Punitive damages are only awarded to punish the negligent party for especially egregious actions. This type of compensation is rare, but if you receive it, you would owe taxes on it.

Have You Been Injured In A Kansas City Area Car Accident?

If you've been injured in a car accident you need to speak with an experienced car accident lawyer as soon as possible. Contact us online or call our Kansas City office directly at 816.471.5111 to schedule your free consultation.