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

July 16, 2020 | By Riddle & Brantley Accident Injury Lawyers
“Do I Have to Pay Taxes on My Car Accident Settlement?”

Are Car Accident Settlements Taxed?

In most cases, car accident settlements are not taxed in North Carolina, but there are some exceptions.Have you been in an automobile accident and received a settlement to help you pay for injuries and damages? You may need this money for treatments, rehabilitation, and repairing your vehicle. You may be wondering, “Are car accident settlements taxable in North Carolina?” or “Do I have to pay taxes on my car accident settlement?” The short answer is no, you will probably not have to pay taxes on your car accident settlement. However, there are a few important things to keep in mind when considering whether any portion of your car accident settlement may be taxable.

General Rule About Taxes on Car Accident Settlements:

Typically, any money you receive from a car accident settlement in North Carolina will not be taxable. The reasoning behind this general rule is that the settlement is designed to reimburse you for your medical bills and other out-of-pocket expenses you incurred from your injury.  However, there are some portions of your settlement that may be subject to taxes in certain situations. To take the guesswork out of this question, our North Carolina car accident attorneys have identified the major types of damages compensated for in a car accident settlement and what tax implications these damages may share.

[su_button background="#13182E" color="#ffffff" size="10" wide="yes" center="yes" url="tel:1-800-525-7111" desc="No fee unless you receive compensation."]Talk with an experienced car accident attorney for free![/su_button]

What Are the Different Types of Damages in a Car Accident Claim?

A personal injury settlement is designed to compensate you for several types of damages.  There are two major categories: "Special" damages and "General" damages. Special damages are measurable and objective. Examples include lost wages and medical bills,  These damages are easily quantifiable because they have measurable costs. In contrast, General damages are more subjective. General damages can be thought of non-economic damages because they involve intangible or emotional losses that do not have measurable costs. These damages include any pain and suffering you have endured, such as emotional injury. However, it is important to note that in terms of paying taxes on a settlement, damages are broken down differently: Here’s what you can expect regarding whether you have to pay taxes on your car accident settlement:

How is a Car Accident Settlement Taxed?

Whether you have to pay taxes on your car accident settlement will vary based on the specific type of damages and the state where your accident happened. Portions of a car accident settlement that may be subject to taxes include:
  • Lost wages (loss of income)
  • Medical Expenses (when you take a tax deduction)
  • Interest on your car accident settlement
  • Punitive damages
Here’s how it breaks down:
  • Medical Expenses and Property Damage – Any money you receive for medical expenses (bodily injury), property damage and other specific losses which will reimburse you for any money you have already spent or could lose on expenses are not usually taxed. When you get in a car accident, you will have to pay out of pocket for your medical expenses and vehicle repairs.  Therefore, the compensation you receive for these costs is not considered income and is not taxable.  However, there is one common exception in many states:  when you have taken a deduction for medical expenses related to your bodily injury claim in any prior years to your settlement award. These medical expenses will only be taxed to the extent of the tax benefit. If this scenario applies to you, it is important that you consult with an experienced tax attorney or CPA to determine if you will owe taxes on your compensation for medical expenses out of your car accident settlement.
  • Lost Wages – In North Carolina, the good news is that any compensation you get for lost income normally not considered taxable income. In contrast, other states may treat an itemized reimbursement for lost wages in a settlement award to be taxable wage that is subject to state and federal income tax rates. If you receive compensation for lost wages, make sure to seek the opinion of a tax attorney or CPA to determine if you need to report this part of your settlement as taxable income in your state. Additionally, if you are self-employed and you are reimbursed for lost opportunities or profits for your business, portions of this reimbursement may be subject to income tax.
  • Punitive Damages – Punitive damages are very rare in bodily injury awards. Punitive damages are awarded to send a message that discourages a defendant from engaging in a certain action in the future.  To be eligible for punitive damages, the defendant’s conduct typically has to include things like fraud, malice, or willful and wanton conduct. If you are awarded punitive damages in North Carolina, it is important to consult with a tax attorney or CPA, as punitive damages in North Carolina must be included as taxable income on a tax filing.
  • Settlement Interest – In certain situations, a victim may be entitled to interest on his or her personal injury settlement.  This situation typically occurs if the judgment has been awarded through the court system.  North Carolina tax law treats any interest on a personal injury claim as taxable interest income.
So, in short answer to your question — “Do I have to pay taxes on my car accident settlement?” — remember: you most likely do not need to pay any taxes.

[su_button background="#13182E" color="#ffffff" size="10" wide="yes" center="yes" url="tel:1-800-525-7111" desc=“Need an injury attorney?”]Click to call for a free consultation![/su_button]

Taxes on a Car Accident Settlement: Speak with an Accountant or Tax Attorney

If you have questions about a potential car accident settlement, talk with an experienced injury attorney today.The rules about paying taxes on your car accident settlement can be complicated. Once you have received compensation for your car accident (or another type of accident), it is important you speak with a certified public accountant (CPA) or a tax attorney before filing your tax returns if you have been awarded compensation for bodily injury within the taxable year. Even though your car accident settlement is probably not taxable, you don’t want to get stuck with an unexpected bill from the IRS when it comes time to pay your taxes.

Have You Been Injured in a Car Accident?

Riddle & Brantley is ready to help. If you are in a car accident and get hurt, we are here for you. We can help you navigate the system and answer any questions you have. It is important that you get the attention you deserve and the best chance for compensation which will help you pay for your injuries and other damages. If you need to speak with a tax attorney or an accountant about your settlement, we will gladly point you in the right direction. Please call us at 1-800-525-7111 or fill out the short form below for a FREE consultation with an experienced North Carolina car accident lawyer. There is never any obligation or upfront cost, and we only get paid if we win your case and you receive financial compensation.

What Are People Saying About Riddle & Brantley?

At Riddle & Brantley, we pride ourselves on providing excellent client service and are humbled by the words our clients use to describe their experience working with our attorneys and staff:
  • “If you want a strong firm that fights professionally for your rights and wins, call the Riddle & Brantley firm.” – Donyelle S.
  • “No matter the claim or case, it feels like Riddle & Brantley is there for their client, not just a big payday.” – Christopher F.
  • “Riddle & Brantley is a version of the Legal Dream Team.” – E. Ramos
At Riddle & Brantley we have more than 220 years combined experience handling car accident injury cases. Let our experience work for you. If you are in an accident, please act fast. After a car accident, important information can quickly get lost — and the longer you wait, the more difficult it may be to win your case. Please call our North Carolina car accident attorneys at 1-800-525-7111 or fill out the short form below for a FREE, no-obligation consultation. We serve clients throughout North Carolina, including those in Raleigh, Durham, Fayetteville, Greensboro, Charlotte, High Point, Winston-Salem, Goldsboro, Greenville, Jacksonville, and Wilmington, among other cities and areas. Free consultations are available by phone, email, text, or video conference and there is no in-person meeting required to get started on your car accident case. There are no upfront costs and absolutely no attorney fees unless we recover financial compensation for you. Call 1-800-525-7111 today and let’s review your claim. Justice Counts for those injured due to others’ negligence and we would love to help you fight for justice and compensation if we can.