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car accident settlement

If you were injured in a preventable car accident, you may have the right to pursue a civil personal injury claim and compensation for your losses. In most car accident cases, this compensation is paid in the form of a settlement.

For folks who’ve made it successfully through the personal injury claim process, a monetary settlement is a welcomed and much-needed resolution, as it helps cover things like medical bills, lost income, and pain and suffering. However, settlements can also come with important tax considerations that you must be aware of come tax season.

A Primer on Settlements & Damages

Whether or not car accident settlements will be taxed depends, in part, on the types of damages they cover. As such, it’s important to first know the types of damages commonly included in these cases, and how certain damages are distinguished from one another.

The first major distinction is the difference between compensatory and punitive damages:

  • Compensatory damages compensate the victim for harm and losses caused by the defendant’s negligence.
  • Punitive damages, which are rarely awarded, punish defendants for deliberate misconduct or egregious acts of negligence.

Beyond compensatory and punitive damages, a distinction is also made between the types of damages that comprise compensatory damages. These include:

  • Special damages, which are economic damages awarded for losses that can be easily calculated, such as medical bills, lost income, and property damage.
  • General damages, which are noneconomic damages for intangible losses such as pain and suffering, emotional anguish, loss of consortium, and loss of quality of enjoyment of life.

Taxation of Personal Injury Settlements

As IRS guidance makes clear, the taxability of personal injury settlements, including those arising from car accidents, depends on the facts and circumstances of your case.

While the IRS has taken a stance to generally not disturb settlement allocations that are “consistent with the substance of the settled claims,” there is a lot more to understanding tax obligations as they relate to your specific settlement and tax situation. Thankfully, the IRS does outline when and how portions of a settlement could be considered taxable income. For example:

Physical Injuries or Physical Sickness & Related Medical Expenses

  • According to the IRS, settlements received as compensation for “personal physical injuries or physical sickness” are generally not taxable. This means that the full amount of your settlement will not be taxable if (1) the settlement is for personal physical injuries or physical sickness (including past and future medical bills); and (2) you did not take an itemized deduction for medical expenses related to the injury in prior years.
  • If you did deduct medical expenses associated with your car accident injuries in prior years and receive a settlement for those injuries, you must include in your income the portion of the settlement that is for medical expenses deducted in the previous years.

Emotional Distress or Mental Anguish

  • Settlement proceeds you receive for emotional distress, mental anguish, and other noneconomic damages (aka general damages) are treated the same as those received for personal physical injury or sickness – meaning that they are not taxable.
  • Settlement proceeds for emotional distress and mental anguish must be directly related to your injuries. If they don’t originate from your injuries, or if you were compensated solely for emotional distress without suffering a physical injury (which is rare in car accident cases), they must be included in your income. However, this reported amount can be reduced by previously deducted medical expenses and payments for medical expenses related to emotional distress or mental anguish.

Other Situations Where Settlement Proceeds Can Be Taxed

While most if not all settlement proceeds for medical expenses, emotional distress, and pain and suffering can be excluded from your taxes, the same is not true for other types of damages and situations. For example:

  • Past and Future Lost Wage: Just as earned wages are subject to taxes, so too are settlement proceeds that compensate for lost wages. If your settlement includes damages for past and/or future lost income, they are considered taxable income.
  • Property Damage. Generally, compensation for property damage is not taxable if it simply reimburses you for money you spent to repair or replace a damaged vehicle. However, if you receive damages for the reduction in value of your property, you are required to report the difference as taxable income.
  • Punitive Damages. Most plaintiffs in personal injury cases don’t need to worry about punitive damages, especially if their claims were resolved through settlements. However, if your case is one of the few in which punitive damages were awarded, you must report them and pay taxes. Taxes must also be paid on any interest.

The Bottom Line: Consult with Professionals

While most if not all proceeds from car accidents settlements are generally not taxable by the state of Florida or the federal government, there are far too many nuances and exceptions to this general rule to assume that your settlement doesn’t come with tax implications.

As such, the best way to understand what, if any, tax issues you’ll face after your car accident claim is settled is to discuss its specifics (and your past tax deductions) with a qualified attorney or tax professional.

At Perry & Young, we’re committed to providing the comprehensive support clients need at every stage of their cases. This includes helping them understand how settlements, compensation, and potential tax liabilities work, deciphering how settlement proceeds are allocated, and connecting them with professionals we know and trust when needed. If you have questions about a car accident case anywhere in the Florida Panhandle, we’re available to help.

Perry & Young serves motor vehicle accident victims across the Norwest Florida from offices in Panama City, Tallahassee, Marianna, and Panama City Beach. Call (850) 215-7777 or contact us online to speak with a lawyer.