Are Car Accident Insurance Settlements Taxable?

Taxes on Car Accident Settlements

Some car accident insurance settlements are taxable. However, the portion of the settlement compensating you for medical bills, pain and suffering, income losses, and property damages is not taxable. 

Nevertheless, the car accident insurance settlement is taxable if you recover compensation for punitive damages or income losses not caused by injuries.

Only some portions of a car accident insurance settlement may be taxable depending on how you label and structure your settlement. This is why working with a legal professional before settling your case is crucial.

Car Accident Taxable Compensation	Car Accident Exempted Settlements
Punitive damages	Medical care for physical injuries
Pain and suffering without physical injury	Pain and suffering for physical injuries
Income losses without any injury	Income losses due to physical injuries
Interest on compensation awards	Property losses

How Do You Reduce Car Accident Settlement Taxes?

You can reduce car accident settlement taxes by structuring your settlement in ways that do not trigger tax liability. For example, if your compensation is for medical bills, it is not taxed. The parties can work to classify the settlement for medical purposes, if possible.

Also, labeling a settlement as compensation for pain and suffering makes it exempt from taxes because pain and suffering are derivative of physical injuries. Even if you have some tax liability, you can reduce it by structuring payments over several years so that your total taxable income is not high in any one year.

What Are The Taxes on Lawsuit Settlements?

The taxes on lawsuit settlements are based on the purpose of the settlement. Some kinds of settlement payments are taxed, while other types of compensation are not.

Compensation is taxed at the standard income tax brackets when it is subject to tax. If you receive a large lump sum settlement, you might pay a higher tax rate than you’re used to, based on your typical household income. The taxes on lawsuit settlements are the same income tax rates used in other cases except for portions of the settlement that are exempt from tax.

Car Accident Insurance Settlements That Are Not Taxed

Here are the kinds of car accident insurance settlements that are not taxed:

• Emergency medical bills
• Doctor care
• Medical devices
• Prescriptions
• Surgeries and diagnostic procedures
• Laboratory work
• Physical therapy
• Property damage
• Pain and suffering compensation
• Lost wages or profits due to physical injuries
• Lost long-term income due to disabilities

Car Accident Insurance Settlements That Are Taxed

Here are the kinds of car accident insurance settlements that are taxed:

• Lost income due to something other than injuries, such as not having a car
• Interest
• Punitive damages

Are Punitive Damages Subject To Income Tax?

Yes, punitive damages are subject to income tax. IRS Publication 4345 states that punitive damages are subject to income tax and may be reported as income. You should report punitive damages as “other income” under U.S. federal tax law. They must be reported on a 1040 tax form, and the recipient must pay taxes as though the payments are income.

Are Property Damage Settlements Taxable?

No, property damage settlements are not taxable. If you receive a payment for property damage, you do not have to pay taxes on the settlement amount. That’s because you’re being paid for the reduced value of the property. If you were to be taxed on that amount, you would no longer be paid wholly for the entire loss due to the accident. Tax laws recognize it’s only fair not to tax a victim for a property damage settlement.

Structuring Your Car Accident Settlements

Taxes on car accident settlements vary. It’s essential to be aware of tax liabilities long before you reach a settlement in your car accident case. That’s because the structure of compensation plays a significant role in tax liability.

There are several details to be aware of regarding tax consequences for a personal injury settlement. For example, in general, compensation for medical bills is not taxed. However, that’s not necessarily the end of the story.

If you claim an itemized deduction for medical bills on your taxes, you cannot receive both the benefit of the tax deduction and tax-free compensation for your bills. Consulting with an experienced personal injury attorney will help you navigate this often complex settlement process.

How Can An Attorney Help With Car Accident Settlement Taxes?

Working with a skilled attorney before you settle your car accident claim can help you avoid costly taxes. For example, say you’re paid $100,000 in compensation for punitive damages. If you accept the payment all at once, your highest tax bracket as a single filer is 24%. That means that for a portion of your income, you’ll be paying income tax at a rate of 24%.

However, say you decide to structure the payments over a period of five years. You receive payments of $20,000 each year for five years. In that case, your highest tax bracket is 12%. By waiting a period of time for your payments, you can save yourself 12% tax on a portion of your settlement.

Experienced Nevada Attorneys To Minimize Taxes On Car Accident Settlements

When you work with an experienced attorney, you have someone who knows the techniques to help you with all the details. An attorney not only helps you get the highest dollar amount but also assists you with structuring the settlement so the most compensation stays in your pocket.

They will also work with you to collect your car accident settlement. You can have the peace of mind of knowing you’ve managed your car accident settlement best when working with a Nevada attorney.

Skilled Attorneys For Insurance Settlement Taxes

If you’re wondering how taxes may impact your car accident insurance settlement, you’re already on the right track. Let’s work together to minimize your tax liability.

The sooner we’re involved in your case, the sooner we can do everything possible to maximize your compensation. That includes minimizing or eliminating any potential tax liability. Call us today for your free and confidential consultation with a skilled Las Vegas car accident lawyer.

How To Potentially Reduce Taxes On Your Auto Accident Settlement

If you are wondering, “Are car accident settlements taxable?” The good news is many elements of your car accident settlement will be exempt from taxes. The remaining elements may be taxable, but you can also employ strategies to reduce your tax liabilities.

Structure Your Settlement

The allocation of your settlement determines which portion is taxable. Importantly, the IRS will not question a settlement allocation consistent with the settled claims.

For example, the IRS will probably not disturb a large pain and suffering settlement for catastrophic injuries. 

However, it could assert that you received an auto accident settlement taxable under federal law if you received pain and suffering for minor injuries. Thus, you should adjust the allocation to only put a reasonable amount toward non-taxable payments.

Spread Payments Over Time

Your settlement will be taxable as income in the year you receive it. A large lump sum could push you into a higher tax bracket, causing you to send a larger portion of your traffic accident settlement to the IRS.

Conversely, spreading out your payments over time could keep you in a lower tax bracket and result in a smaller tax payment. Thus, you can potentially reduce your taxes by receiving periodic payments instead of a lump sum.

The IRS Rule On Car Accident Settlement Taxability

Federal law states that income does not include “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.”

Additionally, the law specifically precludes taxpayers from deducting medical expenses and receiving tax-free compensation for those same expenses. The IRS has interpreted this law to exclude taxation on all amounts received for injuries, including compensation for non-deducted medical bills, pain and suffering, and lost income. 

Are You Required To Claim A Personal Injury Settlement On Your Taxes?

You are not required to report non-taxable settlement amounts on your income tax forms. However, you are required to report when you receive an amount that falls under the car accident settlement taxable IRS rules. For example, you will include punitive damages as “other income” on your personal income tax form.

If you received a significant settlement, you should discuss your tax liability with your personal injury lawyer and tax preparer to make sure you comply with IRS regulations.

Will You Receive Compensation For Lost Income? Is It Taxable?

You can receive compensation for lost income, so you may wonder, “Are settlements taxable if they include lost income?” It depends on why you lost the income. According to IRS rules, you do not need to pay federal income taxes on compensation for bodily injuries, including lost income.

However, you must pay taxes if you lose income for other reasons. For example, you must pay taxes on a lost income settlement if you had no physical injuries and only suffered PTSD.

FAQ

Do You Have To Claim An Insurance Settlement On Your Taxes?

You do not need to claim a non-taxable settlement on your taxes but must claim taxable settlement amounts. So, are punitive damages taxable? The answer is yes, and they must be claimed to be taxed.

Do I Have To Report An Injury Settlement To The Irs?

When preparing your taxes, you must first understand the answer to “Are settlements taxable?” You do not need to report an injury settlement on your personal income tax form unless it is taxable.

Are Insurance Settlements Considered Taxable Income?

The taxability of your settlement depends on the reason you received compensation. Any compensation for losses suffered due to an injury will not be taxable.

How Do I Avoid Taxes on My Settlement Money?

You can avoid taxes by shifting your settlement allocation to non-taxable categories. However, the allocation must be reasonable based on the claims you settled.

Will the IRS Take My Settlement Check?

Clients who wonder, “Are personal injury settlements taxable?” primarily worry about the IRS taking their entire settlement check. Most personal injury settlements are not taxable; even when they are, you only pay the percentage for your tax bracket.

Contact Adam S. Kutner, Injury Attorneys, To Learn More

So, are car accident settlements taxable? The answer to this question is very complex. However, we can implement strategies to reduce your tax exposure after receiving a car accident settlement.