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In some cases, you may have to pay tax on a settlement, but in others, you may not, it all depends on the loss that you have been compensated for.
For the most part, you do not have to pay tax on a settlement, but this all depends on the case, the nature of the accident and the circumstances surrounding it. Please note that the only person who can give you valid tax advise is your tax adviser. However, this article can help you to understand which questions you need to ask your tax adviser.
Is my Settlement Affected by the Tax Code?
The Internal Revenue Service says that regarding compensation for injuries or for sickness that damages that have been received because the injured party has injuries or has been ill are excluded from gross income, other than any punitive damages. This is regardless of whether the damages are paid in one lump sum or they are paid over a period of time. However, emotional distress is not considered to be a physical sickness or illness. Damages for emotional distress that can be attributed to a physical sickness or illness are excluded. Damages received that do not exceed the amount of money paid for your medical care that involves emotional distress are excluded.
Medical Expenses and Injuries
When settlements are paid they are usually paid as compensatory damages or general damages. These damages are there to compensate the injured party for their lost wages, medical expenses and any pain and suffering they have experienced. In most cases, where compensatory damages and general damages have been received the recipient will find that the money is not taxed. This is because these types of damages are a means of compensation and seek to reimburse you.
Property and Vehicle Damage
Compensation that has been received for property and vehicle damage is not taxable. This is also the case for the cost of any repairs that needed to be undertaken and reimbursement that you may have received if you had to hire a rental car.
Loss of Income
Any compensation that you received due to loss of income can be taxable. This is because you would have originally paid tax for it if you hadn’t been involved in an accident. The compensation you receive with therefore be taxable. If you are also awarded compensation for other losses you will only have to pay tax on the compensation that can be attributed to your lost income.
Punitive damages are rarely included in car accident settlements. This is because punitive damages are used to punish the defendant so they do not act in the same way again. Punitive damages are usually only awarded in extraordinary circumstances and those in which the defendant has undertaken outrageous behavior. If you are awarded punitive damages you should be aware they are usually taxable.
If you have any questions about your settlement a personal injury lawyer may be able to give you a bit of information about how taxable it is. However, lawyers do not tend to be experts when it comes to the world of tax law so you may want to speak to a tax adviser instead.
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