Do I Need to Pay Taxes on Damages? Our Jacksonville Car Accident Attorney Explains

Ask a Jacksonville car accident attorney whether whoever recovers a settlement or judgment in a car accident case must pay taxes on that recovery, and the short answer in most cases will be “no.” However, “no” is not a hard and fast rule but depends on the nature and circumstances of the settlement or judgment.

While only a tax expert can give advice, facts from this article can help taxpayers prepare appropriate questions to present to a Jacksonville car accident attorney or other qualified adviser for consultation.

Generally, settlements and judgments are the same for tax purposes whether the taxpayer receives the money through either a settlement of claim negotiations or a judgment after a trial.

The Tax Code

The applicable language of the Internal Revenue Service (IRS) regulation on the question of taxation on settlements and judgments is at Code of Federal Regulations Title 26 Section 1:

  1. 104-1 Compensation for injuries or sickness.

This includes damages received on account of personal physical injuries or physical sickness or compensations for damages in general. Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2). Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care for emotional distress.

Medical Expenses and Injuries

Most settlements and judgments are for only compensatory and general damages for medical expenses, lost income, and pain and suffering as direct results from injuries. In such typical settlements, most of the recovery amount is not subject to taxes because that type of settlement or judgment represents reimbursement for actual losses.

Vehicle and Property Damage

Compensation for vehicle damage from car accidents is not taxable. This rule applies to costs of repairs paid and to any reimbursement for rental car expenses while the taxpayer’s vehicle was in the repair shop and unavailable.

Lost Income

Generally, any settlement or judgment amount as compensation for lost income is subject to income tax for the reason that the original income would have been taxable without the loss, and so any compensation to replace that same lost income should be taxable as well. If the settlement or judgment compensates the taxpayer for losses other than income, taxes are due on the prorated portion that compensates for the lost income.

Punitive Damages

Rarely do car accident settlements or judgments award punitive damages, which punish defendants to deter future misconduct in extraordinary circumstances where defendants engage in particularly irresponsible, reckless, outrageous, or egregious behavior. In the rare award of punitive damages in personal injury cases they are usually taxable.

Any personal injury lawyer can offer basic information on the taxability of a settlement or judgment. Most general personal injury lawyers, however, are not experts in tax law. For answers to complex questions about the tax implications of personal injury settlements or judgments, it’s best to consult a tax expert.

Help from a Jacksonville Car Accident Attorney

The precise cause of a car accident is not always immediately apparent. Sometimes one or both drivers are at fault, at other times the state or the city responsible for road maintenance or the manufacturer of unsafe equipment. Our Jacksonville car accident attorney can investigate the claim thoroughly, find the cause(s), and pursue the best result relentlessly in a settlement or judgment for full and fair compensation.

The initial consultation for a car accident claim with a Canan Law attorney is always free. We have years of experience in litigating car accident cases. A Jacksonville car accident attorney at Canan Law can provide a claim evaluation at no cost or obligation. To find out why we are the popular choice for car accident representation, call 904.824.9402 now.

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