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Do I Pay Taxes on a Car Accident Settlement?

Categorized as Auto Accidents

If you’ve recently received a settlement as a result of a car accident claim or lawsuit, you may be surprised to learn that some of that amount may be taxable. How much you owe will depend on the specific details of your claim and how your compensation was distributed.

Your individual car accident settlement likely contains compensation for a variety of damages. These can include medical costs, lost wages, punitive damages and pain and suffering. Although compensation is not taxable for most medical costs and physical injuries, other portions of your reward may be taxed.

Taxable Components of a Car Accident Settlement

Compensation for physical injury or physical sickness as a result of a car accident are generally not taxable. But the below portions of your settlement funds may be taxed:

  • Lost Wages – Recompense for lost wages and lost profits is taxable. This is usually included if you have to miss work as a result of your injury, or if the injury forced you to change occupations.
  • Punitive Damages – Punitive damages are taxable. Although rare in auto accident injury cases, awards for punitive damages can be issued if the at-fault party displayed gross negligence or willfully malicious behavior in causing the injury.
  • Interest – If your claim took considerable time to resolve, you may have interest added to your settlement. The interest amount can be taxed.
  • Emotional Trauma – You may receive compensation for emotional pain and suffering that did not originate from physical injury or sickness. You will owe taxes on this amount.

Additionally, people normally deduct their medical expenses from their federal income taxes. Although repayment for medical expenses is not directly taxable, you will have to report a portion of your settlement as income if it was deducted from your taxes. You can report this amount as “other income” on a 1040 tax form.

The tax rules covering auto accident injury settlements can be complicated and small details can affect your tax liability. If you are in need of a Kansas City car accident lawyer to help assist you with this process, contact Peterson & Associates, P.C. today.