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Do I Need to Pay Tax on a Car Accident Settlement?

Seek Legal Advice From A Personal Injury Attorney

It’s a big victory when you reach a settlement after a devastating car accident. Like winning the lottery, you get an influx of extra income that will make your day so much easier. But what about tax?

This is a question that typically gets asked of a personal injury attorney. Each claim is different per client, but we can assure you that paying taxes is uncommon after a car accident settlement. It is a structured financial amount intended to help you recover from minor to severe injuries, help offset medical expenses, and assist your family.

A car injury lawyer would also ensure that the money you received can also be used to repair or replace external damage, as these funds are not taxable either. Should there be tax-specific questions, you can always reach out to a tax professional as well to gauge your situation.

The Difference Between Settlements or Judgements

Tax rules apply the same for settlements and judgments. Plaintiffs resolve matters outside of court through the defendant’s insurance company in a settlement. In contrast, judgments are received through civil litigation. In that regard, you’d be awarded money if the case rules in your favor.

If there is an amount to be paid, we will help you determine taxability based on the Internal Revenue Service (I.R.S.). Under 26 C.F.R. section 1.104-1, the clause is as follows:

“Damages received on account of personal physical injuries or physical sickness—(1) In general. Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.”

In California, most personal injury cases are tax-free. Unless specified otherwise, I.R.S. and state taxes are not placed on the settlement check. Please note that the I.R.S. does not consider emotional damages as physical injury alone. But it can be incorporated into the financial restitution owed to you from the defendant(s) involved.

The Bottom Line: Injury and Vehicle Damage Compensation Isn’t Taxable

The car accident lawyers of Grey Law want you to know settlements and judgments are primarily for compensatory and general damages. That includes wage replacement, medical bills, pain and suffering, and other expenses that stem from your injury. Any additional compensation can also cover vehicle damage (personal or rental) after the accident.

Lost Income Can Be Taxable

Most accident victims don’t know that lost income compensation is more likely to be subject to income tax. Behind this notion is the understanding that your original wages would have been taxable before the accident. Therefore, any monetary award for wage loss would be taxable.

You’ve Got Questions – We’ve Got Answers. 

Once you’ve gotten medically treated, the best thing to do is reach out to a personal injury attorney specializing in car accidents, truck accidents, wrongful death, or motorcyclist accident cases. At Grey Law, we know exactly the type of damages awarded – and how to obtain them.

About Grey Law

“When it comes to getting you more, I won’t settle for less.” – David Grey
When you or a loved one are injured due to negligence, carelessness, or wrongful acts of another person, David Grey is ready to help. Seeking compensation or negotiating with insurance companies can be stressful, especially while recovering. Let us do that for you. Our Los Angeles personal injury lawyers are well-versed in several practice areas:

  • Traffic Accidents
  • Premises Accidents
  • Personal Injuries
  • Product Liability
  • Nursing Home Abuse

Why do you need a lawyer for accident compensation? With thousands of lawyers in California, we understand it can be difficult to choose the right legal representation. We have 35+ years of experience and secured millions for our clients. From the time you retain our firm, we build your case. For a free case evaluation and consultation, reach out to us at 323-768-0497 or email

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