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Will I Get Taxed on My Car Accident Settlement?


As we approach tax season, it is important that we cover how taxes and settlements relate to one another. 

When you’ve been in an accident that has left you injured, out of work, and struggling financially, the last thing we want to think about is any associated tax that might affect you. We understand that a car accident is stressful enough, however, it’s important that we understand how taxes and settlements work together. There are some cases where a settlement will be taxed, and others where it will not – each case is different. 

Let’s take a closer look:

Personal Injury

According to the IRS, if you have received a settlement for a personal injury and did not take an itemized deduction for medical expenses on the previous years’ taxes, your settlement will remain tax-free. If you did take an itemized deduction for medical expenses on the previous years’ taxes, you will likely have to pay taxes on this portion of the settlement. 

The only damages that are able to be considered tax free are any physical damages and the associated expenses. This includes medical bills and property damage. 

Property Damages

Any settlement in relation to property damages sustained by the accident are generally not taxable. This is as long as the settlement amount for these damages do not exceed the adjusted basis of the property. Any excess settlement amount will be considered income and will, therefore, be considered taxable.

Lost Wages

If you were awarded lost wages within your settlement, you will be taxed on them. Since all wages are always taxed, this should come as no surprise. These wages will be taxed the same way they would have been had you earned them through traditional work. These wages are also subject to pay Social Security and Medicare.

Read More: Catastrophic Injury VS Personal Injury Claims

Punitive Damages

Punitive damages will be taxed and should be reported as other income. Since punitive damages are not meant to compensate the injured, rather, they are meant to punish the injurer, you can definitely expect to pay tax on this type of damages.

Emotional Distress

If you have emotional distress that has originated from a personal injury, the tax status from above personal injuries still applies. However, if your emotional distress is not a result of a personal injury, this portion of a settlement may be subject to taxes. 

If you are concerned about compensation for emotional trauma being taxed, this would fall under medical expenses and be considered not taxable. 

A Final Word

Overall, there are some general rules of thumb when it comes to car accident settlement and taxes. But there are also exceptions to these rules in specific circumstances. It is always best to consult a tax professional as well as your attorney. Questions regarding taxes are also always great to discuss during the settlement process. An experienced attorney will be able to help you understand all of these ins and outs and how your settlement will work. 

Give us a call today if you are seeking legal assistance for your car accident settlement.

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