Are Car Accident Settlements Liable For Taxes?

Close-up Of Two Green And Red Wooden Cars On Desk In Courtroom

While people are focused on winning the case and getting a judgment in their favor, they also have particular questions about receiving the compensation amount, like are they eligible for paying any taxes? 

In most cases, you do not have to pay taxes on the compensation amount received for your injuries and damages sustained after the car accident, as the settlement will repay all your pain, suffering, and losses. 

However, to ensure there are no loopholes or gray areas, contact an experienced car accident lawyer in Roseville. A lawyer is well informed about such complications and will study your case and notify you if there is anything that compromises your compensation amount. Nevertheless, it is always good to inform from your end,  so here are some basics about car accident settlements and tax charges that everyone should know. 

Settlement or judgment- The rules are the same for both. 

Most people get confused between the settlement done outside the court or the judgment given by the jury or judge. However, you can receive a settlement or a judgment, and both are to compensate for your injuries and damages sustained in the car accident. 

So, you will not be charged any taxes in any case. In a settlement, your insurance company will provide you with compensation. In court, the judge will pass the judgment in your favor awarding you with the money after the final civil court proceeding. 

The IRS rule for taxes in settlement or judgments of a car accident case

The IRS rule clearly states that the compensation received on account of any injuries, damages, or physical illness, excludes the average income amount of a person and will not be included in tax evaluation. 

However, emotional distress is not considered a physical illness and is excluded from this rule. Still, if the emotional pain is caused due to the injuries or damages sustained in the accident, it will be compensated and free of any tax payments. 

One thing to keep in mind is that there are different principles and rules for every state, so it is advised to check the laws of your state when it comes to tax evaluation on any amount received. Although most states do not have any charges on the injuries and damages, it is best to confirm it from a professional.

Injury and vehicle damage compensation are eligible for taxes.

Most judgments and settlements for your injuries and damages procured in a car accident are supposed to compensate for your sufferings. So these amounts are awarded as compensatory charges and are not included in your annual income. 

Therefore, any recouped amount is not liable for any taxes, and you are free to use the entire amount for yourself. 

Melinda Jung