In general, most parts of a car accident insurance settlement will not be taxable. However, under U.S. tax codes, some types of damages may count as taxable income. It depends on the taxability of the loss.
Your attorney may be able to offer some general guidelines, but you may want to consult your tax preparer or accountant for details based on your specific situation.
What does the Law Say About the Taxability of Insurance Settlements?
The laws outlining what is taxable income and what is not by the Internal Revenue Service (IRS) come from 26 C.F.R. 1. This generally states that any part of a settlement you receive compensating you for a taxable loss is also taxable. For example:
Medical Care Costs
Medical care, treatment, and related expenses are not taxable in most cases. These damages cover the cost of bills you had to pay. However, if you wrote them off your taxes the previous year, they could be taxable.
Lost Wages
If you receive compensation for your lost income in your car accident settlement, it is subject to tax. This is because these damages cover the loss of your normal wages, which you would typically need to pay taxes on.
Property Damages
Property damages cover the costs of repairing or replacing your vehicle, broken glasses, lost smartphone, and other damaged property. These damages are generally not taxable.
Pain and Suffering
Intangible damages recovered in a car accident case are generally not taxable if they occur because of physical injuries you suffered. However, in some property damage crashes, emotional distress, or other psychological damages may be taxable if you did not suffer any bodily harm.
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What If I Received Punitive Damages?
In most cases, punitive damages are taxable under federal income tax law. These damages do not compensate you for your losses. Instead, they penalize the defendant for their bad behavior. These are rare in car accident cases but may occur:
- When the driver acted in an extremely reckless way, such as a drunk driver
- When intentional injuries occurred
- As the only type of recoverable damage in wrongful death cases in some states, such as Alabama
- As the judge and jury see fit, in other cases
Punitive damages may be substantial in some personal injury and wrongful death cases. For this reason, it is crucial to discuss their impact on your tax situation with an accountant and your lawyer. There may be ways to prevent these damages from pushing you into a new tax bracket or having other issues because the IRS views them as income.
How Will I Know What Part of My Settlement I Need to Pay Taxes on?
It can be difficult to know how much of a settlement covers a taxable loss and how much is tax-free. However, you should receive a 1099 from the insurance company to help you.
When you work, your employer likely sends you a W-2 form the following year so that you can report your income on your federal and state taxes. A 1099 is the form used by parties that pay you but are not your employer.
You will need to include this 1099 in your income when you file your taxes. You may also be responsible for paying additional taxes on this amount, including Medicare and Social Security taxes that your employer did not take out of your paycheck while you were away from work.
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Working with an Attorney Who Can Protect Your Interests
A personal injury lawyer from our firm may be able to help you navigate the car accident insurance claims process, present evidence, and negotiate a settlement or represent you to a judge and jury at trial. We may also offer advice about:
- The possible settlement range of the case
- The strength of the case
- How likely the case is to go to trial
- Whether you will recover taxable damages
- Structured settlements or other options for avoiding large tax bills
- The best options that allow you to recover compensation
Our car accident law firm provides complimentary case reviews and works based on contingent fees, meaning your family will not need to pay anything up front for our services.
The deadlines for beginning a car accident lawsuit vary by state, and there may be additional requirements you need to meet. In general, these time restrictions are as follows:
- Louisiana: One year, La. Civ. Code Art. 3492
- Alabama: Two years, Ala. Code § 6-2-38
- Arkansas: Three years, Ark. § 16-56-105
- Mississippi: Three years, Miss. Code Ann. § 15-1-49
A Lawyer from Morris Bart, LLC, Will Assess Your Car Accident Case for Free Today
If your car accident occurred in the Gulf South, the Morris Bart law firm may be able to help. We provide free consultations with a personal injury attorney from all 16 of our locations across four states: Alabama, Arkansas, Louisiana, and Mississippi.
You can talk to a car accident lawyer serving your nearest Morris Bart law office today for free. Call (800) 537-8185 to get started now or to make an appointment.
Questions?Call (800) 537-8185
to find a Morris Bart office near you.
