Is A Car Accident Settlement Taxable Income?
Do I Need to Pay Tax on Loss Benefits from a Vehicle Accident Settlement or Judgment?
The taxability of your loss benefit award depends on the type of loss being compensated. If you have received a settlement following a Florida car accident, you’re probably wondering, “Do I have to pay taxes on this money?” The short answer is this, “In most cases, no.” However, that is not a hard and fast rule, and the answer depends on the circumstances and nature of your settlement.
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It is important to know that only your tax advisor can give you the best and most reliable tax advice. The comments in this discussion will help you formulate the proper questions to present to your tax advisor. Only by discussing these issues with a tax expert can you be confident enough that you are receiving the most current tax information.
Generally, settlements and personal injury claims benefits are viewed the same when it comes to the question of taxes. So, it does not matter whether the compensation money you received is through a settlement at the claim stage or through a judgment following a trial.
How Does the Tax Code Affect My Settlement?
The applicable provisions of the Internal Revenue Service (IRS) regulation addressing the question of taxability of settlements and judgments are found under 26 C.F.R 1. It reads in part:
- 1.104-1 Compensation for injuries or sickness.
(c) Damages received on account of physical sickness or personal physical injuries or—(1) In general. Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Emotional distress is not considered a physical injury or physical sickness.
However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2). Section 104(a)(2) also excludes damages, not in excess of the amount paid for medical care (described in section 213(d)(1)(A) or (B)) for emotional distress.
Money Received for Injuries and Medical Expenses
The vast majority of settlements and claim awards are for “general damages” and “compensatory damages”. Those categories of damages are meant to compensate you for your lost wages, medical expenses, and the pain and suffering arising directly from your injuries.
In a typical settlement where you receive general damages and compensatory damages for your physical injuries and medical expenses, most of that amount is not subject to taxes. This is because that type of settlement or judgment is meant to compensate you for your out-of-pocket losses. Our auto accident attorneys can help you claim the maximum compensation you deserve.
Money Received for Vehicle and Property Damage
Any damages or compensation you receive for vehicle damage resulting from a Florida car accident is not taxable. This is true for the costs of repairs paid as well as any reimbursement you may have received for a rental car while your vehicle was in the repair workshop.
Compensation for Lost Income
Generally speaking, any settlement amount you receive as compensation for lost income is subject to income tax. The rationale behind this taxation is that your original income would have been taxable had you not suffered the income loss, so any compensation intended to replace that same lost income should be taxable as well.
If your settlement or judgment award includes compensation for other types of losses in addition to lost wages, such as medical bills, you still pay taxes on that portion of the loss benefits that are attributable to the lost wages.
What If I am Awarded Punitive Damages?
It is rare for punitive damages to be included as part of a car accident settlement or judgment. This category of personal injury damages is usually intended as punishment against the defendant and to deter future bad behavior.
They are only awarded in extraordinary circumstances where the defendant has engaged in outrageous or egregious behavior. In the rare event that you do receive punitive damages in a personal injury claim, know that those damages are almost always subject to taxation.
Your Florida personal injury attorney should be able to provide basic information on the taxability of your judgment or settlement. But it is important to remember that most personal injury attorneys are not experts in tax law. So, if you’ve got more complex questions about the tax implications of a personal injury judgment or settlement, it’s best to seek out the advice of a tax professional.