In most cases, you won’t have to pay taxes on the money you get from your vehicle insurance settlement but there are always exceptions. Car accident insurance settlements are almost always exempt from federal income tax, provided you did not claim an itemized deduction for the particular injury in prior years.
Understanding Tax Laws Surrounding Settlements
It will save you a significant amount of money if you know what the tax laws in regards to your settlement. This will enable you to spend the entire settlement getting back on your feet and recovering. Let’s take a look at some of the typical forms of damages granted, as well as the IRS regulations below.
The IRS Rule You Need to Know After a Car Accident
Settlements and court judgments are taxed under 26 CFR 1. Here are the highlights of some of the most critical issues concerning auto accidents:
- Any compensation you get from a bodily injury or illness you can exclude from your taxable income. This kind of settlement will include medical bills, as well as, pain and suffering in most cases.
- If punitive damages are included in your settlement, be aware that emotional distress cannot be treated as a physical injury or sickness.
Laws on Taxability of Insurance Settlements
The Internal Revenue Service (IRS) uses regulations, including 26 CFR 1, to determine what income is subject to taxation and what is not. Not every portion of a settlement that compensates you for a taxable loss is taxed. For example:
Medical Care Costs — Medical care, treatment, and associated costs are not deductible in most circumstances. These losses compensate you for the money you lost on unpaid invoices. However, if you deducted them from your taxes the year before, you may be liable for paying taxes on them this year.
Lost Wages — Taxes are applicable on any compensation you get for lost wages after a car accident. As a result of these losses, you will have to pay taxes on your regular earnings which is usually covered by these damages.
Property Damages — If your car is damaged or totaled in the car accident, you’ll need to get reimbursed for the repairs or replacement of the car if necessary. Taxes are often not levied on these damages.
Distress and Anguish — If you sustained bodily injuries due to an automobile accident, the intangible losses you receive are typically not taxed. IRC Section 104(a) specifically excludes emotional distress from the definition of physical injury or physical sickness, except where damages are paid for medical care attributable to such distress.
How Much of My Settlement Will I Have to Pay in Taxes?
It’s not always clear how much of a settlement is deductible from taxes and how much isn’t. However, the insurance provider should send you a 1099-Miscellaneous form to assist you. A 1099 is the appropriate form to use when you receive compensation from another source other than your employer.
When you submit your taxes, you’ll need to attach this 1099 Miscellaneous form. Aside from paying any extra taxes that your employer didn’t pay while you were out of work, you may also have to pay additional Medicare and Social Security taxes.
How an Attorney Can Help You Understand and Arrange Settlement
A car accident attorney can assist you with your vehicle accident insurance claim, settlement negotiations and representing you in court. An attorney may be able to guide you through the following in your case:
- Potential settlement range
- Quality of the evidence presented
- The likelihood of a trial
- Entitlement to damages
- Most effective methods for obtaining restitution
Legal Fees and Deadlines for Filing
You shouldn’t have to endure financial hardship as a result of an event that someone else is responsible for. The deadlines for filing a lawsuit following a car accident differs from state to state, and you may have to meet additional requirements. If you are considering filing a lawsuit, contact an attorney to find out what the statute of limitations is in your case.
Contact the Dolman Law Group Today
When drivers are injured in an accident but don’t know where or how to begin the process for compensation, we are here to assist you. Please get in touch with us as soon as possible. Do not hesitate to reach out and schedule a free consultation today with the Dolman Law Group.