When you finally get your settlement award for your car accident case, it can be a huge relief. After all, you’re counting on the money you receive to continue to make ends meet while you try to recover and get your life back. Many people, however, are rightly concerned about whether this money that’s sorely needed will be taxed, and if they’re going to get a call from the IRS in April as a result.
In most cases, accident awards aren’t taxable, but there are certain exceptions depending on the kind of loss for which you’re getting compensation. Learn about the taxability of vehicle accident settlements and judgments, and how a car accident lawyer can give you the best chance for a settlement.
Medical Expenses and Taxability
Under the U.S. Tax Code, any settlements or judgments you receive for compensatory damages or general damages — damages that compensate you for medical expenses, pain and suffering, emotional trauma, loss of consortium, and the like — are not taxable. That’s because these damages are designed to help you recoup the money you’re spending on treating your injury. They’re not extra money.
Lost Wages and Future Earnings
Any compensation you receive for lost wages and future earnings potential, on the other hand, is intended to replace your normal income. As such, it’s treated by the IRS as income. That means you’ll be subject to income tax at your normal tax rate for this specific kind of compensation.
Vehicle and Property Recovery
Just as with medical expenses, any awards you receive for losses you suffer from vehicle or property damage are designed to help you recover losses. It’s not new income, and as such isn’t generally subject to any kind of tax. You’re intended to spend this money to repair or replace the property you lost.
Punitive damages are extraordinarily rare in terms of judgments and settlement awards. They’re designed specifically to punish someone for extreme, particularly egregious or deliberately malicious acts, and to discourage them from ever doing such a thing again. They’re only awarded in very extreme circumstances where someone deliberately tried to harm you when someone does something like drunk driving or similar acts.
In such cases, the damages you receive aren’t meant to help you recover from the loss. They’re not compensating you for something you need to replace or repair. They’re simply extra money on top. As such, they are treated as income, and they are taxed.
How a Car Accident Lawyer Helps
If you’ve been in a vehicle accident and you need help pursuing your case, the right car accident lawyer can help. Car accident attorneys can fight insurance companies’ attempts to avoid payment, and they can advise you on which parts of your settlement might be taxable while fighting to get the most for the damages you’ve suffered.
For years the attorneys at Harris and Graves have helped people just like you throughout the Columbia, South Carolina region to get compensation for the injuries they’ve suffered at others’ hands. If you’re in a circumstance like this and you need help, complete our contact form or give us a call for a free discussion about your case today.