Consequences resulting from car accidents can be severe and sometimes catastrophic. As such, many car accident injury victims may look for ways to receive compensation for their injuries, medical expenses, and property damage. However, what many may wonder is if a settlement obtained through a car accident settlement or insurance is taxable. In general terms, some settlements may be taxable while others may not. Taxability of your car crash settlement will depend on specific criteria surrounding your particular case which is further discussed in this article.
The Philadelphia car accident lawyers at The Reiff Law Firm invite you to keep reading as we discuss more about your car accident settlement and its taxability in Pennsylvania. If you wish to learn more about your case in a free, confidential consultation, call our law offices at (215) 709-6940 today.
Do I Have to Report My Car Accident Settlement to the IRS?
Every year, citizens should report their income tax to the Internal Revenue Service (IRS). As part of a tax return, taxpayers must ensure they provide accurate and complete information of any income received during the taxable year. In the case of car accident settlements, taxability will depend on the specific circumstances surrounding your case.
According to the IRS, if you were granted a settlement for personal injuries or physical sickness for which no deductions were made in previous years, the totality of the settlement would be non-taxable. The same rule would apply for a settlement arising from anguish and emotional distress. However not all car accident settlements are tax-free.
The IRS also states that if you were granted a settlement from a personal injury or physical sickness claim, “[Y]ou must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s).” Proceeds granted from a settlement for emotional distress and anguish, not based on a personal injury or sickness must also be reported.
Typical Examples of Taxable and Tax-Exempt Car Accident Settlements
Since only the damages granted because of pain, emotional trauma, and illness are taxable, some portion of your settlement may still be taxed. Damages you receive to compensate you for other losses might still be taxed. Some examples of taxable and non-taxable car accident damages include the following:
Loss of Wages
After a car crash, a person might not be fit to go back to work. Car accident injuries can be so devastating that a person may require weeks, months, or years to recover from injuries like whiplash or back injuries. When a person is unable to return to work, they may look for compensation for their loss of wages. For tax purposes, whenever a person seeks compensation for lost wages, they would be receiving the equivalent of their paycheck from the settlement. Since the IRS normally taxes you for any income or wages, proceeds from the settlement would be taxable.
Punitive damages are awarded in personal injury cases as a means of punishing the wrongdoer for his or her egregious actions and deterring others from committing similar actions in the future. Punitive damages are not common in car accident settlement cases. However, if awarded, the proceeds from punitive damages are likely to be taxable.
Emotional Distress and Anguish
Much like settlements arising from personal injury or physical illness claim, pain and suffering settlements are tax-exempt if no deductions for medical treatment were made for the settlement during previous years. However, the IRS states that settlements that do not originate from a personal injury or physical illness are taxable and must be included as income on your 1040 or 1099. According to the IRS’s Settlement Taxability publication, the amounts a taxpayer must report will be reduced in the following two instances:
- “Amounts paid for medical expenses attributable to emotional distress or mental anguish not previously deducted.”
- “Previously deducted medical expenses for such distress and anguish that did not provide a tax benefit.”
While settling your case may seem like an excellent way to obtain compensation for your injuries, lost wages, and medical expenses, it may not always be the best option. Frequently, insurance companies and the at-fault party will offer you a mere fraction of what you might otherwise obtain through a lawsuit. After a car accident occurs, do not accept any offer from the wrongdoer(s) or their insurance company until you talk to an experienced Upper Darby car accident attorney first.
Our Philadelphia personal injury lawyers offer free, confidential consultations to all of our clients. The Reiff Law Firm handles a wide variety of cases including:
- Amusement Park Accidents
- Brain Injuries
- Car Accidents
- Construction Injuries
- Premises Liability
- Slip & Fall Injuries, and more.
To learn more about your situation and how our experienced lawyers can assist you, call The Reiff Law Firm today at (215) 709-6940.