If you’ve recently received your car accident settlement, you might be wondering if it will be taxed. The answer to this question is not straightforward and requires in-depth information. However, you should know that:
- You will not be taxed a car accident settlement that’s meant to compensate you for pain and suffering
- The money you receive to fix your car or replace it isn’t usually taxable
- You should always consult a tax professional if you have any specific concerns or questions
The good news is that if you hired a Fall River car accident lawyer, they might be able to advise you on the way forward regarding your settlement. The reason is they’ve handled so many similar cases and have a good idea about whether your settlement is taxable.
Whether or not you settled your car accident claim in court or outside of court, the same tax rules apply. Keep in mind that there are state income and federal tax laws and most states have adopted rules like this one.
Compensation for general damages isn’t taxable
Most judgments and settlements are for general and compensatory damages. The settlement award is meant to cater to your pain and suffering, lost wages, out-of-pocket expenses, and medical expenses that arise directly from your injuries. If you are awarded a settlement for general damages, that amount is usually not subject to taxes.
Compensation for car damage isn’t taxable
If your car was damaged as a result of the car accident, any compensation you receive to repair or to replace the car is not taxable. This also applies if you receive reimbursement for a rental car while your car is being worked on at the repair shop.
Compensation for lost wages is taxable
Any settlement that you receive to compensate you for lost wages is subject to taxes. The reason for this is that your original income would have been taxed anyway had you not been involved in an accident that caused you to lose your wages. So any compensation you receive that’s intended to replace your lost income should be taxed as well.
Punitive damages are subject to taxes
Although it is rare, if you are awarded a settlement for punitive damages as part of your judgment or settlement, the award will be taxed. Punitive damages are intended to punish the defendant and deter future behavior. Punitive damages are not common and they are only awarded under special circumstances where the defendant engaged in egregious or outrageous behavior.
Your Fall River car accident lawyer should be able to provide you with basic information
Your car accident lawyer in Fall River should be able to tell you whether your judgment or settlement is taxable. However, you should keep in mind that your lawyer is not a tax expert and you might need to consult someone well versed with tax law. They should be able to refer you to someone who can give you tailored advice about the taxability of your settlement.
How are punitive damages taxed?
Punitive damages should be reported as income even if they were awarded as part of a settlement for physical injuries.
Lawyer fees are a tax trap
Your car accident lawyer didn’t charge you an upfront fee but agreed to a contingency fee. This means that they’ll only get paid when they win your case. When you receive your judgment, your lawyer will deduct their contingency fee and send the rest to you. However, for tax purposes, it will be assumed that a hundred percent of the money was recovered by you and your Fall River car accident lawyer even if the at-fault party paid your lawyer their contingency-fee cut.
Since you were involved in a car accident, your case is fully non-taxable and you shouldn’t have any tax problems. However, if you settle your car accident lawsuit for intentional infliction of emotional distress against the other driver for $150,000 and your lawyer keeps $90,000 you might think that you’ve saved $60, 000 dollars of income. However, the IRS will assume that you have $150,000 of income. The good news is that there was a tax bill passed in 2017 that details no deduction for legal fees. It is, however, essential that you receive tax advice early before your case settles and an agreement is signed.
We are happy to help
If you’ve been involved in a car accident in The Fall river area you can contact one of our fall River car accident lawyers to review your case free of charge. Call us today at 508-676-0001 to schedule your free initial consultation.
