As with any tax question, there isn't a simple answer to that. Some damages are taxable, others aren't. Once you're awarded damages—whether through settlement negotiations or by a judge following a trial—you'll have to figure out what, if any, portion of it is taxable.
When you work with a car accident attorney to file a claim, he will make every effort to ensure that the bulk of your settlement isn't taxable. We break down which damages are taxable and which are not.
Damages for Medical Expenses Are Not Taxable
If you were injured in a car accident that wasn't your fault, the bulk of your compensation will likely be for your medical expenses. You won't have to pay taxes on this portion of the settlement. These damages cover the following types of expenses:
- Emergency room costs
- Doctor visits
- Physical or psychological therapy
- Scans and x-rays
- Surgeries and hospital stays
- Assistive devices
- Any other medical expenses
These damages are clearly tied to the physical injury, so there's generally no question about them being taxed.
You may also be awarded damages associated with a physical injury that aren't for medical expenses. If they're part of an award directly related to your physical injury, they're not subject to taxation. However, sometimes they're harder to prove to a judge. These damages may include money to compensate for the following:
- Lost wages
- Pain and suffering
- Emotional distress
- Loss of consortium
- Property damage
In order for the IRS to accept these damages as non-taxable income, the settlement will have to be clearly identified as the result of a personal injury claim.
Damages Awarded for Emotional Injury Are Taxable
If you're awarded a settlement for emotional injuries associated with a car accident, that money would be taxable.
In other words, if you weren't physically injured in a car crash, but you were emotionally traumatized by the experience, you may be awarded damages for pain and suffering, but those damages would be subject to taxation. This would include damage awards for depression, anxiety, and post-traumatic stress disorder.
If you're awarded damages for lost wages related to an emotional trauma, that money would also be taxed. However, compensation for the cost of medical treatment for emotional trauma would not be taxable.
Punitive Damages Are Taxable
Sometimes, juries award punitive damages as a way to punish an egregious offense. These damages can be significant, as the goal is to make the offender suffer for what he has done.
For example, a drunk driver may be ordered to pay punitive damages for intentionally endangering others by driving under the influence. While these damages are awarded to the victim, they're not considered part of the settlement for physical injury, and are therefore considered taxable income. You would pay income tax on the amount just as you would any other income.
How a Car Accident Attorney Can Help
When you work with an experienced car accident attorney to negotiate your settlement or, if necessary, to represent you in court, he will present your claim so there's a clear delineation between taxable and non-taxable damages. He may file two separate claims: one for personal injury and one for non-personal injury, so it's clear to the IRS which portion is taxable. He will also make every effort to connect your pain and suffering and lost wages directly to your physical injuries so the damages won't be subject to taxation.
When you try to go it alone in a car accident claim involving injuries, it may put you at a tax disadvantage. Contact us online or call us directly at 888.348.2616 to learn more.