Do I Have to Pay Taxes on My Car Accident Settlement?

January 29, 2025 | By Riddle & Riddle Injury Lawyers
Do I Have to Pay Taxes on My Car Accident Settlement?

Do I have to pay taxes on my car accident settlement? The answer to that question depends on the type of damage you receive compensation for and state jurisdiction. Typically, most car accident settlements are non-taxable. Speak to a local car accident lawyer to clarify state law and local regulations or if you've suffered an injury in a car accident. You’ll want to recover financial compensation for your losses.

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Tax Implications of Car Accident Settlements and Judgments

The Internal Revenue Service (IRS) tax implications divide settlements and awards into two groups, determining whether taxable or non-taxable income. The first group relates to physical injuries, and the second is for non-physical injuries. Within these groups, the claims generally fall into three categories: actual, emotional distress, and punitive damages.

Actual Damages

Actual damages may result from physical or non-physical injury. They aim to make injured parties whole by returning them to their position before their accident and injuries. Actual damages are the monetary losses you incurred due to your car accident, such as medical bills, vehicle and property repairs, and lost income. Compensation awarded for medical bills and property damages are not taxable income.

The language around lost income can be challenging concerning tax implications on settlements and judgments. If a physical injury caused income losses, they are non-taxable—such as in a car accident. However, damages received to compensate for economic loss, such as lost income, business income, and benefits arising from employment-related lawsuits, are not excluded from gross income. You must pay taxes on those income losses.

Also, suppose you took an itemized deduction for medical expenses related to physical injury or sickness in prior years on your taxes. In that case, you must include that portion of the settlement for medical costs you deducted in any previous years to the extent the deduction(s) provided a tax benefit.

Emotional Distress Damages

The compensation you receive for emotional distress or mental anguish is treated the same as that attributed to physical injury or physical sickness. It’s not taxable. However, if the compensation for emotional distress or mental anguish does not originate from physical injury or sickness, you must include it in your income. There are additional implications for when they become taxable. The language can be complex. Have a local car accident lawyer clarify them further if relevant to your case.

Punitive Damages

Punitive damages only apply in lawsuits. A jury awards them to punish defendants for heinous negligence or intentional acts. They are taxable and should be reported as other income, regardless of whether the case involves physcial injuries.

One exception is that punitive damages for wrongful death are excluded from gross income, pending state statutes. Refer to IRC Section 104(c), which allows the exclusion of punitive damages concerning applicable state law.

Paying Taxes on Interest

If you received pre- or post-judgment interest on your settlement, it is taxable income. It doesn't matter if your physical injury or illness settlement damages are tax-free—the interest is not and must be claimed as interest income.

Compensation You May Receive in a Car Accident Settlement

The compensation you may receive in a car accident settlement depends on the complexity of your case, the severity of your injuries, the length of your treatment, and the need to assess damages for long-term care and disability. Compensation may include economic, non-economic, wrongful death, and punitive damages.

Economic Damages

Your attorney will start by tallying the economic damages in your case. These are the monetary losses incurred from the car accident and often include:

  • Medical Costs: Healthcare expenses associated with your injuries are usually the biggest economic damage. These costs include emergency care services, hospitalizations, surgical and post-op care, primary care visits, imaging (X-rays, CT scans, MRIs), medical devices, prescriptions, copays, home health services, travel expenses, and time to and from medical appointments, and future medical costs. 
  • Rehabilitation: Severe injuries often require rehabilitation services, such as physical therapy, nerve physical therapy, assistive technology training, spasticity management, bladder and bowel management, speech and language therapy, life planners, mental health specialists, pain management specialists, and vocational and occupational therapy. 
  • Disability Damages: Compensation for disabilities or permanent impairment, including loss of a limb, hearing or vision loss, partial or total paralysis, brain injury, cognitive issues, and chronic pain.
  • Property Damages: Accident victims who sustain property damages due to a car accident can seek compensation for those losses. Common property damages include vehicle-related repairs, rental car and rideshare services, cellular phones, laptops, glasses, sunglasses, car seats, and outside damages to yards, gardens, landscaping, fences, mailboxes, and structures.
  • Household Services: If your injuries require hired services to assist in daily activities, the costs of those services may be recouped. Household or domestic services include cleaning, laundry, cooking, lawn maintenance, and meal, grocery, and prescription delivery.
  • Lost Earnings: When car accidents cause you to miss work, you can recover lost earnings. This includes income losses you incur from missing work after a car accident, such as salary, wages, tips, commissions, bonuses, health benefits, paid time off, vacation days, sick leave, and retirement, as well as diminished earning capacity or future earnings. 

Your economic damages can be proven by the paper trail of evidence accompanying them, including medical billing statements, vehicle repair or property damage repair invoices, and receipts for out-of-pocket costs. You can provide pay stubs, tax returns, bank statements, and an employer-lost income statement for income losses.

Non-Economic Damages

After your car accident attorney calculates your economic damages, they can assess your non-economic damages. These are commonly known as pain and suffering and include:

  • Acute and chronic physical pain
  • Life-long pain management
  • Mental anguish and suffering, like anxiety and post-accident depression
  • Psychological distress, such as post-traumatic stress disorder (PTSD)
  • Loss of enjoyment of life
  • Loss of society and companionship
  • Limitations or restrictions on daily activities
  • Disabilities and physical impairments
  • Cognitive issues
  • Partial or complete paralysis
  • Worsening of previous conditions 
  • Shortened life expectancy
  • Humiliation and loss of self-esteem (common with disfigurement and scarring)

The development of a substance use disorder due to prescribed pain management, such as opioids, can lead to compulsive use and have significantly negative impacts on your life. Speak to a car accident attorney immediately if you're prescribed pain management has led to the development of a substance use disorder. You may be entitled to recover compensation for the damage.

To prove non-economic damages, you must keep a consistent, detailed, and dated journal documenting your pain and suffering. Entries should detail pain severity, location, duration, frequency, and anything that worsens or lessens your pain. It should also outline any daily limitations or restrictions on your daily activities or work-related duties.

Wrongful Death Damages

Families mourning the loss of a loved one due to a car accident may have a right to file a civil cause of action called wrongful death. Wrongful death allows claimants to seek compensation for damages, including:

  • Final arrangements (funeral, burial, cremation)
  • Final healthcare costs
  • Pain and suffering of your loved one before their passing
  • Pain and suffering of the claimant(s)
  • Loss of consortium for surviving spouses
  • Loss of parental support for surviving children
  • Loss of household services (cleaning, cooking, parenting)
  • The lost prospect of inheritance 
  • The decedent's lost income (salary, benefits, future income)

State law determines who is eligible to file for wrongful death. However, most generally allow surviving spouses, children, and parents to be primary beneficiaries. Secondary beneficiaries may include siblings, cousins, aunts, uncles, nieces, nephews, and grandparents.

Punitive Damages

Again, punitive damages are less common in car accident settlements. They only apply when a defendant's actions are so egregious that they require additional financial punishment to dissuade others from repeating the offense. A jury may award punitive damages in a car accident resulting in wrongful death.

Why You Need a Car Accident Attorney to Maximize Your Settlement

Car accident victims with legal representation generally receive higher compensation than those without lawyers. Knowing that should provide peace of mind for those serious about maximizing their settlements. Attorneys are excellent at getting insurers off your back, gathering, preserving, and analyzing evidence, reconstructing car accidents, consulting experts, calculating damages, negotiating settlements, and litigating car accident lawsuits.

Working for Contingency

One of the more significant benefits of hiring a car accident lawyer to represent your case is that they work for contingency. Contingency arrangements stipulate that clients pay nothing upfront and have no out-of-pocket costs. They also state that attorneys will not be paid unless they win your car accident claim. They will take their contingency percent of compensation before issuing you your car accident settlement check. Contingency takes the pressure off injured parties who otherwise may not afford legal counsel.

Getting Insurance Companies Off Your Back

Insurance claims adjusters can be relentless in getting you to admit total or partial liability or accept a quick settlement. They may pressure you to give a recorded statement or even resort to using bad faith tactics, such as unreasonably delaying or denying claims.

Retaining an attorney immediately shuts that down. They will no longer be permitted to contact you. If you have already provided the insurance company with a recorded statement, you must contact a car accident attorney.

Gathering, Preserving, and Analyzing Evidence

Substantial evidence is prudent for proving negligence in a car accident case. Your attorney will first collect time-sensitive evidence, such as video footage, to preserve it. Standard car accident evidence includes:

  • The police report with witness statements and contact information
  • Photos documenting the accident scene, including vehicle position, road conditions, tire tracks, and skid marks
  • Pictures or video visually demonstrating the extent of your injuries
  • Video of the car accident or scene taken by traffic and security cameras, dashcams, and witness cell phones or viral social media uploads
  • Detailed medical records
  • The at-fault driver’s cell phone records at the time of your collision

After gathering the evidence, your car accident lawyer will analyze it for anything, establishing negligence and liability. Provide your attorney with evidence you have, including photos or video you took on your cell phone at the accident scene.

Reconstructing Car Accidents

Car accident reconstruction uses a scientific method involving mathematics and physics to determine the conditions of your collision. Using computer simulations, they can discover the speed at which the vehicles were going, angles of impact, and other contributing factors to the accident. Their expert witness testimony is invaluable to your car accident settlement claim.

Consulting Expert Witnesses

Your attorney may consult various expert witnesses from their network who are relevant to the circumstances of your case. These experts may include economists, engineers, healthcare professionals, life planners, and vehicle safety and highway safety experts. They help validate the extent of injuries and damages, including the need for long-term care.

Calculating Compensatory Damages

Your compensatory damages include your economic and non-economic damages, including medical bills, income losses, property damages, household services, and pain and suffering. Car accident attorneys will thoroughly evaluate all possible damages to maximize claim compensation. Once they value your case damages, they draft and send a demand letter to all liable insurance companies.

Negotiating Reasonable Settlements

Negotiations are a critical stage during the car accident insurance claims process. It's when liable insurers and your lawyer exchange offers and counteroffers until a settlement is agreed upon. Car accident lawyers are skilled negotiators who confidently demand insurance companies pay reasonable settlements. Once all parties agree, insurers will pay your attorney, who disburses funds after collecting their contingent fee, negotiating your medical bills, and paying liens placed against your settlement.

Litigating Car Accident Lawsuits

Most car accident claims are settled without the need for litigation. However, when negotiations fail, your attorney may file a civil lawsuit to recover damages. In that case, they will represent your case in court before a judge and jury who will award or deny compensation.

Consult a Car Accident Attorney Immediately

If you've been injured or lost a loved one due to another driver's negligence, contact a car accident attorney today. You'll want to determine a strategy for securing a settlement before state statute limitations expire.

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