Do you have to pay taxes on car accident compensation? Car accident compensation can help you get back on your feet after a devastating accident. The funds received can cover medical expenses, lost wages, assistive living devices, and many other expenses that can follow in the aftermath of an accident. These funds may be taxable, nontaxable, or partially taxable. It is crucial to understand the impact any settlement will have on your taxes so you can properly file your taxes and make any estimated payments before penalties and interest accrues.
Generally speaking, compensation for personal injuries is nontaxable. This includes any settlement received for a wrongful death. However, if you pay for expenses out of pocket and then claim the injuries as a tax deduction, any compensation received at a later date to cover medical expenses, etc. is taxable as income. Similarly, compensation received for pain and suffering, mental anguish, etc. is nontaxable as long as the compensation received is for these specific reasons. However, any portion received for compensation of mental anguish that is not related to the accident itself is taxable by the IRS.
Compensation received to cover interest is also taxable. For example, if you receive $50,000 in car accident compensation + $1,000 for interest, the $1,000 for interest is considered taxable income. Punitive damages are almost always considered taxable income. For instance, if the jury believes the individual acted with wanton disregard for safety, they may award punitive damages for the motorist's negligence. The IRS considers this income as fully taxable and must be reported as "other income" on your tax return. It is important for individuals to make estimated payments on this income as they can face penalties and fines for failing to do so. However, there is an exception to this rule. In states where motorists are only entitled to seek punitive damages for a wrongful death claim, the settlement received is considered nontaxable income.
Brad Pistotnik represents car accident victims in Topeka, Lawrence, Kansas City, Wichita, Overland Park, and other cities in Kansas, Illinois, and Nebraska. Our office works closely with clients to ensure that car accident compensation is properly accounted for to minimize our client's tax liability in the aftermath of an accident. This includes providing full documentation to show the portion of each settlement award that stems from personal injuries, emotional distress, interest, etc.
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