Do You Pay Taxes on a Car Accident Settlement?

After you reach a car accident settlement agreement, your compensation quickly gets divided into many pots to cover the costs that piled up after your accident — medical bills, vehicle damages, and other payments. As you total up all that is due, you may worry that you will also owe taxes on your car accident settlement amount. This guide will help you determine whether your compensation will be affected when you file your taxes.

I Just Received a Car Accident Settlement. Do I Need to Pay Taxes on It?

For the majority of those who go through a car accident settlement process, the answer is no. However, you may owe taxes depending on the types of compensation you received as a part of the settlement or judgment. Your car accident lawyer or a tax professional can help you determine if you need to pay taxes on the types of relief you received.

What Are the Tax Deductible Car Accident Settlement Amounts?

Because the compensation received in most car accident settlements or judgments is relief for medical costs or vehicle damages, injured parties will not need to worry about paying taxes on their settlement amounts. These types of relief include the following categories.

Injuries and Medical Expenses

Also called general and compensatory damages, these are not taxable since they are intended to refund your out-of-pocket costs. This may include financial relief for:

  • Medical costs
  • Pain and suffering
  • Physical injuries or illnesses due to your accident

Note that in order to deduct medical expenses on your taxes, they must exceed 10% of your adjusted gross income, or 7.5% if you are 65 or older.

Vehicle Damages and Repairs

Relief for the costs of damages to your vehicle due to the accident are not taxable. These may include financial support for:

  • Vehicle repairs
  • Vehicle replacement
  • Rental car or other transportation costs due to repairs or replacement

What Are the Taxable Car Accident Settlement Amounts?

The two types of relief that are taxable when received in a car accident settlement are lost wages and punitive damages. Read below to determine if you may have received these types of damages.

Lost Income 

If you were unable to work due to loss of transportation or while healing from your injuries, your lawyer may have asked for lost income or wages as part of your compensation. This also includes loss of future wages if the injuries you sustained prevent you from continuing in your field of work. These amounts are taxable, as they are considered a replacement for taxable income that you would have earned had the accident not occurred.

Punitive Damages

This type of compensation is rarely a part of car accident settlement or judgment amounts, but it may be awarded in extreme cases where the other party was shown to have been under the influence of substances or driving recklessly, or to have maliciously or deliberately caused the accident. Unlike other types of compensation, these amounts are added to a settlement or judgment with the intent to punish the defendant. 

If you believe you were awarded either or both of these types of compensation, you should contact your car accident attorney or an accountant to determine whether you owe taxes on your settlement. To calculate the amount you owe to the IRS, you should consult with a tax professional. Failure to pay taxes as owed can result in serious financial and legal consequences.  

Texas Car Accident Lawyers with the Experience to Protect Their Clients

Lopez Law Group is a legal team with over 45 years of collective experience getting justice for clients. We proudly serve the Weslaco, Tyler, Spring, Mission, McAllen, Laredo, Houston, Edinburg, Corpus Christi, Brownsville, and Harlingen areas. If you’ve experienced losses due to a car accident or other personal injury, contact us online or call (956) 968-7800 to schedule your free case consultation.

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