While getting a settlement award for a vehicle accident can sometimes be a huge pain to get, once you actually get the settlement, having that money in your pocket can be a huge relief. Perhaps you were under some financial strain and having difficulty making ends meet while you were waiting for the claim. If that’s the case, receiving the settlement will make life easier.
Many people have the concern that the IRS will tax away a large portion of the money they have received in a vehicle accident settlement. This can be especially concerning if the money was already desperately needed and any reduction in the amount received would make life even more difficult. The good news is that in most cases, vehicle accident settlements aren’t taxable. There are exceptions, though, and it’s a good idea to be aware of them. A good Personal Injury Lawyer in Georgetown can help you with the more complicated portions of figuring out what is and isn’t a possibility of being taxed.
Taxes and Medical Expenses
Many vehicle accident settlements include compensatory damages for medical expenses, pain and suffering and emotional trauma. According to the US Tax Code, these types of compensatory damages are not taxable. The reason for this is because these damages are not considered to be extra money. They’re considered to be designed to help you recoup the money you’ve spent to treat your injury.
Future Earnings and Lost Wages
If your settlement includes compensation for lost wages or future earnings, that compensation is intended to replace your normal income. For this reason, lost wages and future are considered by the IRS as income and are taxable. You will be taxed at the normal tax rate for this type of compensation.
Recovery of Property and Vehicle Costs
Vehicle and property recovery costs are placed in the same category as medical expenses according to the IRS. This means any compensation you’ve received for the damage of your property or vehicle is not considered to be new income. It’s simply designed to help you recover losses and as such isn’t usually taxed. The purpose of this money is to repair or replace the property you lost.
Punitive Damages
Punitive damages are designed to punish someone for deliberately malicious acts as a way to discourage them from doing that again. They are rare in terms of judgements and settlement awards and are only awarded in extreme circumstances.
These damages are not intended to be used to recover from a loss. This means they’re not compensating the person in the accident for something they need to repair or replace. Punitive damages in vehicle accident settlements are considered to be extra money. And since they are extra money, they’re considered income and are taxed.
Conclusion
These are the basics of what is and what isn’t taxed when it comes to compensation received in vehicle accident settlements. If you are in a situation where you’re not sure if you’ll be taxed or you feel you are unfairly being taxed, it’s a good idea to hire a skilled car accident attorney. They are experienced at fighting insurance companies for attempts to avoid payment and will also be able to advise you on which parts of your settlement might be taxable.