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Do I Have To File Taxes On My Car Wreck Injury Settlement?


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11/29/2015
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Do I Have to File Taxes on My Settlement Check for a Car Accident?

 

If you have successfully negotiated a car accident settlement with an insurance company or another defendant, the amount that you negotiated is unlikely to be the amount you walk away with. Even after paying your legal expenses, you are likely to be subject to federal taxation of at least some of your settlement. Federal taxes will account for the vast majority of any tax burden that you have to bear.   

 

Make sure to have your settlement agreement itemized so that every dollar you received is attributable to a particular loss you suffered – pain and suffering, emotional distress, medical expenses, lost wages, property loss and punitive damages. This will make it more difficult for the IRS to demand more than you actually owe.

 

Tax Breakdown

 

Here is how the IRS will treat each item of your personal injury settlement:

 
  • Pain and Suffering: Damages for pain and suffering are non-taxable, as long as they compensate you for physical injury (and the associated physical pain or loss if bodily function), and as long as the amount represents a compensation for physical rather than emotional distress. It is important that your personal injury settlement agreement clearly address this distinction.
     

  • Emotional Distress (also known as “mental anguish”): As indicated above, damages for purely emotional distress are considered taxable income by the IRS.
     

  • Medical Expenses: Compensation for medical expenses is non-taxable with one loophole: If you have taken a federal tax deduction for out-of-pocket medical expenses, the reimbursement you receive is taxable (to prevent you from doubling down on your medical expenses exemption).
     

  • Lost Earnings: If you receive compensation for, say, lost wages while you were in the hospital, you will be taxed for it, on the reasoning that if the accident had never happened you would have been taxed on your wages anyway.
     

  • Property Losses: Compensation for property losses (car repair, for example) is generally non-taxable.
     

  • Punitive Damages: In the unlikely event that you receive compensation as punitive damages, the IRS will tax you on them. Keep in mind that the state of Missouri will take 50 percent of any portion of a car accident settlement that is designated “punitive damages” (and the IRS will not tax you on that portion).

 

Wrongful Death Settlements

 

If the accident victim dies as a result of the accident, Missouri wrongful death law allows spouses, children, parents and grandchildren to file a wrongful death lawsuit against the party responsible for the accident (and consequently grants you the leverage to negotiate a wrongful death settlement). You are entitled to damages for funeral and burial expenses; the victim’s medical bills, lost earnings and pain and suffering; and your own losses such as loss of services, sexual relations, counsel, guidance, comfort and emotional support.

 

The same principles that apply to a personal injury settlement apply to a wrongful death settlement, except that any amount awarded for the deceased victim’s pain and suffering is taxable.

 

If you are negotiating a car accident personal injury settlement, or if you have received such a settlement and are wondering how much of it is taxable, contact Alvin Wolff at 314-241-2500 for a free initial consultation.

 
 
 


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