Settlements And Taxes: What You Need To Know

If you have been through a car accident, you know what a frustrating and scary ordeal it can be. If you have received money from a settlement from the party at fault, you need to take several things into consideration before spending the money. Taxes may be due on some or all of your settlement, depending on the type of claim that you filed. The following are the different claims and settlements on which you may have tax liability:

Physical Injury

Judgments for bodily or physical injuries are not taxable. It does not matter if you got your settlement in court or through other means, you will not have to pay any taxes on the money received in a bodily injury claim. These judgments are typically comprised of not only money for injuries, but will also compensate for lost wages, pain and suffering, and the legal fees for your auto accident attorney.

Mental Injury

Judgments for mental or emotional injuries are taxable. If you cannot prove that the mental injury was caused directly from the physical injuries sustained, the judgment will be taxed. Emotional and mental injuries from a car accident can be comprised of post-traumatic stress disorder, depression, or other mental distress.

Punitive Damages

All punitive damages are taxed under the law. Punitive damages are awarded in order to financially punish the person responsible for the accident if it is proven that very harmful and reckless behavior caused the accident and your subsequent injuries. Punitive damages can be awarded for cases of drunk driving, careless operation of a car, texting while driving, and anything the judge determines to the irresponsible behavior that lead to significant damages. One way to get around paying taxes on punitive damages is to have your attorney request that your settlement be separated from your compensatory damages. Compensatory damages will include money for lost wages and medical expenses. This will make completing a tax return easier.

Interest Payments

All interest that accumulates on your settlement is declared taxable income. The judgment will begin to accrue interest from the date the claim is filed until you are paid the final amount of damages. If you file your claim on the first of the month and you are paid the final payment on the last day of the month, you will receive interest for all of those days in-between payments.

Taxes are not something to play around with, so it is important that you know when you owe money to the IRS. Work with your attorney to ensure you have paid what is owed before you make any financial plans.