Taxation on Settlements: Do I Have to Pay Taxes on My Award?

Brian News

“In this world nothing can be said to be certain, except death and taxes.” This very famous quote from Benjamin Franklin can almost be amended to include “car accidents,” since the vast majority of Americans will be involved in at least one collision in their life. Those who are unfortunately injured as a result of their accident may be awarded compensation as a result of a settlement, jury verdict, or judgement award to help pay for things such as lost property, medical treatments, and more.

But many people forget that this income could be subject to that life certainty: taxes. When they find out, the first question we usually receive is “Do I have to pay taxes on that money?” The good news is that for the majority of our clients, the answer is no. However, there are some instances when you might, which we’ll discuss in further detail on this blog.

What Does the IRS Code Say?

The language regarding taxability of settlements and judgements can be found in 26 C.F.R 1, and indicates that non-punitive damages received are excluded from gross income, so long as they are received as a result of physical sickness or injury. This applies whether they are received either as a lump sum or via periodic payments.

In simpler terms, the money you receive for “compensatory damages” and “general damages” are excluded from your income when you file your taxes, and are therefore not taxable. These categories of damages are meant to compensate you for your out-of-pocket losses on things such as your medical bills, medication, rehabilitation treatments, lost wages, and pain and suffering that you sustain directly from your injuries.

Additionally, any settlements you are awarded for your vehicle damage resulting from the accident are also not taxable. This includes all money you were paid for the costs of repairs as well as any reimbursement you receive for a rental car while your vehicle was in the repair shop.

Taxable Damages

There are two primary types of damages that are subject to taxation. The first: compensation for lost income. If you are awarded compensation for the wages you would have received from the work you missed as a result of your injury, this compensation is subject to income tax. The logic of this is that if you would not have been injured and been at work like normal, your wages would have been taxable in the first place, so therefore your damages are taxed accordingly.

The second case is a much more rare circumstance: punitive damages. These are exceedingly rare, and are usually only awarded as a punishment to a defendant who was outrageously or grossly negligent to prevent them from doing it again. In these instances, the judge may opt to force them to pay punitive damages, which go beyond the amount of your losses in the incident. However, you should know that these losses are almost always taxable.

If you have further questions regarding the tax implications of your personal injury case, do not hesitate to consult with an experienced Kentucky car accident lawyer from Bahe, Cook, Cantley & Nefzger, PLC. We take great pride in protecting the rights of our clients, and we fight to obtain the justice they deserve in each case we take. We are proud of the numerous industry accolades our team members have received, as well as the long record of success which has seen us obtain millions of dollars in compensation for our clients’ losses.

To speak with an attorney about your car accident case, call Bahe, Cook, Cantley & Nefzger, PLC today at {F:P:Site:Phone}.