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

Is Compensation From My Accident Taxable?

Being in a car accident can result in numerous different expenses, and you can hire a car wreck lawyer in Los Angeles to help you receive compensation for these damages incurred from the accident. The most common damages that a car accident attorney will claim in court are:

  • Personal Injury
  • Mental Anguish/Emotional Distress
  • Vehicle and Property Damage
  • Lost Wages
  • Punitive Damages
  • Attorney Fees

After receiving a settlement from an auto accident, you may be wondering if you have to pay taxes on it. The IRS taxes money from lawsuits based on the origin of the claim. Most compensation from car accident claims is not taxed.

Money Received From Bodily Injury

The impact of a traffic collision often results in broken bones, internal bleeding, spinal fractures, brain damage, and whiplash, which is why the most common car accident claim is for medical expenses and injuries. “Observable bodily harm” is explicitly exempt from taxes, according to the IRS.

In a settlement where you receive only compensatory damages for your bodily injuries, then the majority of that sum is not subject to taxes because the settlement is meant to reimburse you for your out-of-pocket losses.

Money Received From Emotional Distress

The IRS classifies emotional distress damages the same was as bodily injury damages. Emotional distress or mental anguish originating from a car accident are not taxable.

However, any emotional distress damages you receive that are not from an existing bodily injury claim are taxable. You should include them as part of your income, and you should write them under “Other income.”

Money Received From Vehicle and Property Damage

Your vehicle may have been severely damaged in the accident, and it may have been declared by your insurance as undriveable. In these cases, your car wreck lawyer should have ensured that the other driver is held liable for the property damage to your vehicle.

In most car accident cases, the victim receives a settlement for the damage to their car. This is meant to be used to repair the car or to buy a new one. If you received a settlement for your car, then the sum will not be taxed.

Money Received From Lost Wages

If your personal injuries are so serious that you have to take time off work, then your personal injury attorney should have gotten you compensation for any lost wages. Lost wages are defined as income that you are no longer earning because the accident has caused you to be unable to work. These are often compensated in lawsuits having to do with personal injury.

These compensated wages are considered income in the eyes of the IRS, and they are subject to income tax the same way the original income would have been.

Punitive Damages

Punitive damages are awarded to deter the defendant from acting so egregious in the future. However, these damages are not tax-free. Punitive damages are fully taxable and should be declared under “Other Income” on your tax form.

Can You Write Off Attorney and Court Fees?

Even if your settlement is stated to be tax-free, pre-trial and post-trial interest can be taxed

  • To avoid some of these additional fees and taxes, you can try to have your auto accident lawyer settle your case outside of court rather than have it go to judgment.

As springtime rolls around, you may be tempted to try to write off payments to your injury attorney as a business expense. However, the accident injury attorney in Los Angeles you paid to handle your car accident claims cannot be written off the way fees from a workplace lawsuit can.

Any legal fees from your car accident cannot be included in your itemized deductions.

Ensuring You Receive the Highest Compensation

Following a traffic collision, you will have a lot on your plate. Not only do you have to deal with the emotional turmoil of such an ordeal, but you have to tend to your bodily injuries and figure out how you are going to get around if your car is totaled.

Hiring an experienced law firm for auto accidents like Grey Law will take a load off your back because you can trust us with all aspects of your case. An attorney from Grey Law will examine your case and move forward with the strongest arguments that place fault on the other driver.

By choosing Grey Law as your car accident injury attorney, you are putting your case in capable hands.

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