Things to Know About Car Accident Settlements and Taxes

Settlements after traffic incidents are in place to cover medical bills, lost wages, and other damages. But when you receive a compensation amount, will those settlement dollars be taxed? The answer isn’t always straightforward. While some parts of a settlement may not be subject to taxes, other portions could be.

To avoid any surprises, lean on experts. For example, consult with a tax professional who can help you understand what to expect. Additionally, when you begin working with a Boca Raton personal injury lawyer, talk through their contingency fees to be sure you are familiar with the overall value of your settlement.

What Parts of a Settlement Are Taxable?

Generally, the IRS does not tax compensation for physical injuries or illnesses that result from a car accident. This means that if your settlement includes money to cover medical expenses related to your injuries, pain and suffering, or emotional distress arising from those physical injuries, you won’t have to pay taxes on those amounts. These types of compensation are viewed as restitution rather than income, which is why they’re tax-free.

While compensation for physical injuries is typically tax-free, there are other parts of a car accident settlement that may be subject to taxation.

• Lost wages. If part of your settlement includes compensation for lost wages, that portion may be taxed as regular income. The IRS considers lost wages as a replacement for the earnings you would have received if you hadn’t been injured, so they’re treated like regular wages and subject to the same tax rules.
• Punitive damages. A court may award punitive damages to punish the defendant for reckless or negligent behavior. These funds are almost always taxable. This is because they are viewed as income, not compensation for a specific injury or loss.
• Interest on the settlement. When interest has accrued while a case is pending, that interest is taxable. The IRS treats interest as income, so you’ll need to report and pay taxes on any interest received from the settlement.

Once you are aware of what your settlement will likely be, or after receiving a settlement, consult with a tax advisor or accountant. They can help you plan for any tax obligations and ensure you comply with IRS regulations.

Have You Set Aside Funds?

If your settlement includes compensation for lost wages, punitive damages, or interest, it’s a good idea to set aside a portion of the money to cover potential taxes. This way, you won’t be caught off guard when tax season arrives.

Also acknowledge that most personal injury lawyers, including car accident lawyers, work on a contingency fee basis. This means that your Boca Raton personal injury lawyer only gets paid if you win your case. The fee is typically a percentage of your settlement or award and is not taxable.

Should you talk to a tax professional? The tax implications of a Delray Beach, Deerfield Beach, or Pompano Beach car accident settlement depend on the details of the situation. To learn more, connect with the injury lawyers at Leifer & Ramirez. Call 561-660-9421 to schedule a consultation.