Taxes are a big topic right now. Accountants and lawyers are hard at work figuring out how the Tax Cuts and Jobs Act changes clients’ tax liabilities. Personal injury clients want to know, “Are car accident settlements taxable?” After representing car accident victims for the last 35 years, I can tell you there is no single answer to that question. The answer depends on the claims underlying the settlement, the types of damages awarded and the settlement structure.
The new tax law, effective January 1, 2018, does not appear to impact car accident settlements. Nevertheless, car accident victims should always consult a tax professional before agreeing to a payout.
Car Accident Lawsuits Contain Several Types of Claims
In a personal injury lawsuit, a person responsible for causing harm compensates the victim for the resulting damages. So, a driver who causes a car crash must pay people hurt in the accident. Typically, the payor is an insurance company. If the damages exceed the insurance policy limits, the driver is responsible for paying.
Car accident victims suffer physical, emotional and financial injuries. Physical injuries include concussions, broken bones, and bruises. Emotional injuries include depression, anxiety, post-traumatic stress disorder and disruption of important relationships. Financial injuries include past and future lost wages, car repairs, property damage, medical expenses, rental car expenses and more.
Car accident claims can be broken down into three general categories:
- Actual damages from a physical injury
- Emotional distress damages flowing from a physical injury
- Punitive damages
Compensatory damages, a term often used with car accident lawsuits, include actual damages and pain and suffering damages (emotional distress). Punitive damages are another category, which may apply to reckless or grossly negligent drivers. These damages are intended to punish the driver and deter other drivers from engaging in similar conduct. Punitive damages do not compensate a victim for specific losses.
Car Accident Settlements Include Payments for Different Types of Claims
Car accident settlements include payment for all the “winning” claims. That is, the claims the insurance company agrees to pay or the court says the driver must pay.
Common compensatory damages include:
- Medical care and related expenses
- Physical therapy
- Emergency services
- Vocational rehabilitation
- Mental health counseling related to the accident
- Lost wages and future loss of earnings
- Car repair or replacement
- Rental car or other alternative transportation
- Travel expenses
- Emotional distress and mental anguish
- Pain and suffering
- Value of household services
- Loss of consortium
- Legal costs
Are all payments to car accident victims taxable?
Not all payments to car accident victims are taxable. In most circumstances, compensatory damages are not taxable and punitive damages are taxable. When a physical injury causes emotional injuries (pain and suffering, emotional distress, mental anguish), those damages are not taxable. If the only injuries sustained are emotional and not physical, compensation for emotional injuries is most likely taxable.
Car accident victims receiving settlements should consult a tax expert prior to finalizing the settlement herenapotheek.nl. The victims should understand the tax implications of a payout when making decisions about the settlement. For example, if a person hurt in an accident has taken a prior tax deduction for accident-related medical expenses, a portion of the settlement equal to that itemized deduction is taxable.
If the underlying claim in a car accident lawsuit is wrongful death, different tax rules may apply. States differ in how they classify wrongful death damages, which can affect tax liability.
Can a structured settlement help with tax liability?
Compensation for catastrophic injuries can include payment for anticipated future losses including lost wages, medical care, rehabilitative therapies, and in-home or nursing home care. Large settlements can be paid out over time to maximize the amount available to pay future expenses. I use my 35 years of experience representing accident victims to structure settlements for maximum compensation.
An experienced car accident lawyer understands how to properly classify the types of damages paid through a settlement, as well as how damages should be paid out over time. I negotiate your settlement with attention to the potential tax implications of any agreement.
Contact a Long Beach Car Accident Attorney for Help
Your Injuries Are Personal to Me
An experienced car accident lawyer can make the process of obtaining just compensation for your injuries less stressful. Based on my 35 years of advocating for victims, I know how to build a persuasive case. I understand the many dimensions of car accident litigation and I will help you understand the process.
I will ensure you understand the financial, emotional and tax implications of any settlement offer. You will have all the information you need to make the best decision for you and your family.
I have helped thousands of clients obtain full compensation for their accident injuries. I will fight for your right to full compensation. Because your injuries are personal to me, I handle all aspects of your claim.
Call me today to discuss your situation. You are under no obligation, and you will never pay any money unless you recover damages for your injuries. I offer bilingual services and am available 24/7 to talk to you about your case.
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