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Are Car Accident Settlements Taxable? | The Mark Casto Law Firm

On Behalf of | Feb 9, 2022 | Firm News

Are Car Accident Settlements Taxable?

Many people who are involved in car accidents in Georgia receive settlements that compensate for medical costs, lost wages, pain and suffering, and other expenses related to their accidents. A settlement is the result of an insurance claim filed with the victim’s insurer and/or the insurance provider of the party who was at fault. Some victims of car accidents receive damages as the result of a personal injury lawsuit. The question is, are car accident settlements taxable? The answer to this question is not always straightforward. Those who want to learn more may want to consider a free Strategy Session with The Mark Casto Law Firm at 706-450-7071.

Tax Considerations in a Settlement

Types of Compensation

When someone is involved in a car accident that was due to the negligence of another party or parties, there are several types of compensation that may be awarded either through a settlement or judgment. These include:

  • Property damage, which includes costs to repair damage to the vehicle or replace it if the vehicle was totaled
  • Medical costs, which may include medical treatment, hospital stay, and other related expenses
  • Lost income for the wages lost while in the hospital or recovering and unable to work
  • Pain and suffering, which is compensation for the physical pain and suffering related to the physical injuries suffered in an accident as well as trauma
  • Emotional damages that are not related to physical injuries (PTSD, depression, emotional distress)
  • Punitive damages, which are meant to punish the responsible party – not typically awarded in car accident settlements or judgments

Some of these types of compensation are taxable, while others are exempt from tax payments.

Compensation of Medical Costs

Most people who seek settlements or file personal injury lawsuits in cases involving car accidents do so to get compensation for medical costs related to physical injuries. A victim may be awarded money to cover their out-of-pocket medical costs for things such as:

  • Doctor visits
  • Surgery
  • Hospital stays
  • Prescription drugs and over-the-counter medications
  • Rehabilitation
  • Wheelchairs, crutches, and other devices that aid mobility

According to the Internal Revenue Service (IRS), settlement amounts awarded for medical expenses are not taxable.

Compensation of Lost Wages or Income

Car accidents often leave victims in significant pain depending on the extent of their injuries. This sometimes requires the victim to remain in the hospital for weeks or longer. A doctor may not release someone to return to work for some time, even after they have returned home. The compensation for lost wages or income received in a settlement is designed to make up for income loss, so that the victim can pay their bills and maintain their household. In some cases, a victim may be entitled to compensation of future income. Is this type of compensation taxable?

The IRS views compensation of lost income or wages as the money a person would have been paid if they were able to work. Taxes would have been withheld by the employer, so it is considered taxable and should be reported as such on line 7 of Form 1040 (wages, salaries, tips, etc.).

Compensation of Property Damage

Many car accidents result in extensive damage. Some damage is so extensive that the vehicle is totaled, or a total loss. Compensation of property damage in a car accident settlement is not taxable. This compensation may pay for the cost of repairs, cost to replace the vehicle, and the cost of a rental car during the time the vehicle was being repaired.

Compensation of Emotional Damage

Depending on the person and the circumstances surrounding a car accident, emotional distress can be very real. Negative emotions that may result from emotional distress or mental anguish include:

  • Anger
  • Anxiety
  • Depression
  • Embarrassment
  • Fear
  • Irritability
  • PTSD

According to the IRS’ Tax Implications of Settlements and Judgments, emotional distress is not subject to federal employment taxes. However, recovery of damages for emotional distress must be attributed to physical injuries or illness. Otherwise, emotional distress is included as compensation of lost income, and is likely to be taxable. This can be a very confusing and “gray” area for many people. Those with questions about emotional distress may want to consider scheduling a Strategy Session with The Mark Casto Law Firm.

Compensation of Pain and Suffering

Pain and suffering are usually the result of physical injuries suffered in a car accident. When someone suffers serious injuries, they may experience pain that ranges from mild to excruciating for a period of time. The amount someone may be awarded in a settlement or personal injury lawsuit depends on the seriousness of the injuries. In almost all cases, someone who is paralyzed or in permanent pain will receive more compensation than someone who experiences pain or discomfort for a few weeks or months. Compensation awarded for pain and suffering is not taxable by the IRS.

Car Accident Settlements and Taxes are Confusing

While the IRS attempts to provide information to consumers that is correct and helpful, navigating this information can be challenging to say the least. When a car accident victim is in pain or has been left disabled for the short- or long-term, trying to figure out all the tax implications is even more difficult. Whether compensation is awarded through a settlement or in a lawsuit judgment makes no difference to the Internal Revenue Service, and all the types of compensation are equal in both. Those who do not clearly understand what is taxable and what is not may want to consider speaking with a Georgia personal injury attorney.

Consider Scheduling a Consultation Today

A car accident can be life-changing depending on the circumstances. When someone is injured, the costs associated with their injuries can be overwhelming considering medical costs, lost wages, property damage, and other expenses. Those who are negligent are not always held accountable for their actions. Whether through a settlement or court judgment, it is often possible to recover the compensation you are entitled to. Those who have asked themselves the question, “Are car accident settlements taxable?” may want to consider scheduling a free Strategy Session with The Mark Casto Law Firm at 706-450-7071.