Most car accident victims are happy and relieved to resolve their case through a settlement or judgment. However, receiving a large check can bring up worries of a possible tax burden.
The good news is that the IRS won’t tax most of the money you receive as compensatory damages in a settlement or judgment directly related to your physical injuries. There are, however, portions of a car insurance settlement in Texas that are taxable.
Understanding your rights can help prevent any surprises as your case wraps up. Our Dallas car accident attorneys can help you fight for compensation and understand the taxes you may owe after. Schedule your free consultation today if you were injured in a crash.
Do Car Accident Settlements Get Taxed?
Texas doesn’t have a personal state income tax, so you won’t owe any state taxes on a car accident settlement if you are a Texas resident. Federal taxes are another matter. The Internal Revenue Service (IRS) dictates how the different aspects of your car accident award will be handled. Fortunately, most categories of damages are not taxable.
Section 104 of the Internal Revenue Code excludes from gross income any money received in a settlement paid “on account of personal physical injuries or sickness.” In other words, those parts of your settlement won’t be subject to federal income taxes.
Physical vs. Non-Physical Injury
This is the most important distinction when determining whether your settlement or verdict is taxable. Compensatory damages attributable to a physical injury are generally not taxable. Though you should have your settlement or verdict reviewed carefully by an attorney or tax professional, this may include compensation for:
- Medical and hospital bills
- Ambulance bills
- Physical therapy and rehabilitation
- Prescription medication
- Transportation costs for medical care or rehabilitation
- Medical equipment
- Home health services
- Nursing home care
- Vehicle or home modifications
- Vehicle damage
- Pain and suffering
- Disfigurement and scarring
- Physical impairment
- Emotional distress
- Humiliation
Parts of Your Car Accident Settlement That Could Be Taxed
While damages related to your physical injuries are not taxable, certain damages you collect from a car accident case could be taxed. For example, non-economic damages, such as emotional distress and humiliation, require particular attention because these kinds of damages are sometimes trickier to tie to a physical injury.
If you cannot establish the tie, they will not be tax-exempt. However, there is an exception when the compensation is for “actual medical expenses related to emotional distress that was not previously deducted.”
Further, some car accident cases can result in punitive damages. These are damages added above and beyond regular compensatory damages to “punish” wrongdoers for egregious behavior and discourage future misconduct. For example, a driver with multiple DUIs might be ordered to pay punitive damages if they drunkenly cause an accident that results in severe injuries or death. While these damages aren’t common, they are subject to federal income taxes.
How a Knowledgeable Car Accident Lawyer Can Reduce Your Tax Burden
While there is no way to guarantee that your entire personal injury settlement or award will be tax-free, our knowledgeable Texas car accident attorneys can help you maximize your financial recovery.
1. Document the Nature of Your Damages
Again, for personal injury damages to be tax-exempt in the eyes of the IRS, they must be linked to your physical injuries. The key to securing this exempt status is to thoroughly document the nature of your damages and substantiate them with detailed medical care records and expert opinions.
2. Allocate Damages Appropriately
Careful allocation of your damages in a settlement or court award is essential to save money on taxes. Any money you receive should be itemizated, specifying which portions are for medical expenses, lost wages, pain and suffering, and other damages. Or lawyers can argue for a more favorable allocation to reduce your tax burden.
3. Punitive Damages
Unlike compensatory damages, punitive damages are subject to a federal income tax. There is an exception in wrongful death claims, but it only applies if you live in a state that does not allow other types of damages in wrongful death claims.
4. Seek Professional Tax Advice
The U.S. tax code can be complex, confusing, and subject to change. If you are concerned about your tax burden following a car accident settlement, consult your attorney or a tax professional for advice.
Contact Shamieh Law Today About Your Car Accident Case
Do not worry if you find yourself wondering, “Do you have to pay taxes on a car accident settlement?” Our experienced personal injury lawyers can help you understand how taxation will impact your case result. We will also do our best to secure a settlement or verdict that minimizes your overall tax burden.
The car accident attorneys at Shamieh Law offer compassionate and effective legal representation to accident victims and their families. We take great pride in helping our clients navigate the legal process and collect the fair compensation they deserve. Contact us today to get started with a free, no-obligation consultation. You pay us nothing unless we win your case.
