The answer to this question is, “it depends on several factors.” Many car accident settlements are non-taxable; however, as with most tax issues, there are exceptions to the general rule. Therefore, you want to consult an experienced car accident lawyer before you accept any settlement or sign any documents for the insurance company.
Once you have accepted the settlement and signed a release, a car accident lawyer may not be able to undo the settlement to correct a negative consequence. It is best to consult with an attorney as soon as possible after an accident to learn about your legal rights and options for recovering compensation for your losses and injuries.
When Are the Proceeds from a Car Accident Settlement Taxable?
The Internal Revenue Service nor the State of Massachusetts taxes proceeds from a settlement that compensates you for your physical or emotional pain. Compensation for property damage is generally not considered as taxable income. However, there are some instances in which you may be required to pay income taxes on a portion of your settlement.
For example, if you claim medical expenses related to the accident on your tax return, the IRS may require you to pay income taxes on the portion of your settlement that reimburses you for your medical costs. Another exception may apply if your compensation is only for your emotional loss with no physical loss. Loss of income may also be taxable. For lost income, the rationale is that the income would have been taxable had the accident never occurred; therefore, any reimbursement for loss of income should also be taxable. Additionally, if you are paid interest on the amount of money you are owed for your damages, the interest could be considered as income for tax purposes.
Because tax issues can be complex when related to a car accident settlement, we strongly urge you to seek the advice and counsel of an experienced car accident lawyer. We offer free consultations so you can learn more about car accident claims, lawsuits, and settlements.
How Much is My Car Accident Claim Worth?
Valuing a car accident claim involves several factors. Your actual financial losses, including property damage, lost wages, and medical bills, can be reimbursed in full. However, calculating your pain and suffering damages is not as simple as adding the amounts of invoices, bills, and lost income together to arrive at a settlement amount.
When calculating the compensation amount for pain and suffering damages, we apply several factors including:
- The type of injury sustained in the accident;
- The severity or seriousness of your injuries;
- The amount of time it will take for you to recover from your injuries;
- Whether you suffered scarring, permanent disability, or disfigurement; and,
- How your injuries impacted your daily life and your relationship with family members and others.
Pain and suffering damages are subjective. You cannot base your potential recovery on another person’s settlement, even though you may have suffered the same type of injury.