Learning How To Recover

Your Motor Vehicle Accident Settlement And Taxes: What Every Person Should Know

26 August 2015 by Susie Torres

In the midst of a motor vehicle accident claim, the primary thing on your mind is getting a settlement so that you can pay your personal, property and medical expenses. However, many people rarely think about the requirements that come along with accident settlements, specifically when it comes to taxes. While this is not always the case, there are some scenarios in which you will have to pay taxes on the money you receive for your accident settlement.     

Medical Expenses And Loss Of Income

The type of settlement you receive will determine whether you'll be taxed. A more common type of settlement payment is medical expenses. This payment is intended to provide compensation for your medical expenses, pain and suffering and any out-of-pocket costs you incurred while recovering from your injuries. Since this type of settlement is meant to be more of a reimbursement, it is not taxable. On the other hand, settlements intended to cover your loss of income are different.

When you receive a settlement that is intended to backpay you for income you lost while recovering from your injuries, expect to be taxed. The reason for this is that had you been at work and earned the money, you would have been taxed. It can sometimes get confusing when you have combined payments, such as a settlement that includes medical expenses and loss of income. In this case, you would still need to set aside a portion of the loss of income amount to pay taxes.

Punitive Damages

A rare form of accident settlement payments is punitive damages. Punitive damages are those payments are basically intended to serve as a punishment for the negligent party. For example, a driver who had previously been cited for speeding several times might be forced to pay punitive damages to the victim if their continued speeding was the primary reason for their collision with another driver.

Punitive damages are taxable because they are considered compensation. They are not a reimbursement for money that you had to pay out as part of your recovery, but instead money you earned, so be prepared to pay taxes. 

In many instances, an attorney (such as one from Burke Schultz Harman & Jenkinson Attorneys at Law) should be able to tell you long before you to take receipt of your settlement whether or not it will be taxed. However, in the event your attorney does not have this conversation with you, make sure inquire in order to prevent any penalties. 

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