If you have met with an accident and received the settlement amount, the next question that will come to your mind is – is the amount taxable? With the proper guidance and directions, you can reduce the taxable liability. You can refer to this article to learn more about whether or not the car accident settlement amount is taxable.
What is the Nature of Compensation?
In most cases, the settlement amount received from a car accident is tax deductible. However, there are certain settlements which are taxable. Those certain settlements depend on how the payment was made and its structure. Which settlement will be taxable and not is decided by the IRS.
What is Included in the Car Accident Settlement?
Car accident settlement amounts can be categorized under two heads:
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Economic Damages
These damages are compensated for the monetary loss due to medical bills, rehabilitation costs, lost wages, household expenses, and lost earning capacity. If you need future medical treatment, that is also covered under this.
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Non-Economic Damages
Non-economic damages are all intangible losses. These can include emotional hardship, pain and suffering, loss of enjoyment of life, disability, and damage to reputation.
What is Taxable in Car Accident Settlement?
If the victim recovers lost wages or punitive damages, or the court has given the settlement based on emotional damages, it will be taxable.
What is Not Taxable in Car Accident Settlement?
If the person injured receives compensation based on the injuries, they are not liable to pay taxes. Additionally, the settlement received for emotional distress, suffering, pain, attorney fees, or medical bills is also exempt from taxes.
Why are Lost Wages Taxable?
The IRS will tax any settlement amount you may receive as lost wages. The IRS believes that if you were not a part of the car accident, you would have been paying taxes on your income. Hence, the settlement amount for your lost wages should also be taxed.
The taxation on lost wages is very complicated. At times, the victim has to pay more than they used to pay on their actual income. Other factors are also involved, such as social security tax rates, employment tax withholdings, and medicare tax rates.
Wrapping Up
It is very stressful being a part of a car accident. As a victim, you should claim your injuries and receive your settlement. This article can help you in understanding how your settlement will be taxed.
