Just about all income you earn is subject to Internal Revenue Service (IRS) rules. If you've been injured in a car accident, however, you should be concerned about how the IRS treats lawsuit winnings and settlements too. Since taxes can greatly impact the compensation you get, knowing what to expect before you agree to a settlement or file a lawsuit is vital. Read on so that you can consider the tax consequences of your compensation along with your accident losses.
Taxes Can Be Complicated
Your personal tax situation can vary quite a bit and you should discuss any tax liability issues with your personal injury lawyer as well as an accountant. The information provided below is meant to provide you with some basic guidelines and is no substitute for professional advice. Just be sure not to wait too long to discuss this important issue since taxes can reduce your total compensation considerably and this obligation should be taken into account when deciding on how much you are owed.
Taxes: Owed or Not?
Pain and suffering
This category encompasses the way the accident and resulting injury has affected your life in general. It applies to the emotional suffering brought on by your injures and this payment often exceeds all other categories of payments. Your pain and suffering payment may be extremely large and not subject to taxes in most cases.
This category contains the total of all medical expenses, so far. It includes the payment of any medically-related cost owed to a doctor or medical facility. If you have health insurance, your insurer may seek to have medical costs paid directly to them rather than to the doctor. If you have paid any medical expenses on your own, the money should come to you. Even if the at-fault driver's auto insurance is covering your medical bills, keep up with them. Any payment made to cover related medical expenses is non-taxable. Note, however, that you cannot use a tax deduction for medical expenses when you file your taxes if you are reimbursed for them.
All time off of work should be reimbursed and this type of payment may be taxable. It is meant to stand in for your usual wages, which are likely taxable.
This final category of damages may be rare for most accident victims and it is taxable. The judge adds this form of compensation onto your other damages and is meant to send a message about negligent behavior that goes beyond an accident. Texting or drunk driving and then getting in an accident might be a cause for punitive damages.
To find out more, speak to a car accident attorney.Share