If you received compensation for your injuries in a car accident through a settlement or a judgment against the negligent driver who caused it, you might wonder if you have to pay income taxes on the amount you receive. Here's what you need to know about the taxability of auto collision settlements and judgments so you're surprised when you file your federal and state income tax returns.
What Types of Compensation Require Tax Payments?
In general, our San Diego auto accident attorney explains, the taxability of a car accident settlement or judgment is the same. While much of what you receive isn't subject to income taxes, there are exceptions.
Different Types of Compensation Treated Under Our Tax Laws
- Medical expenses. Compensation for physical injury treatment is not taxable. This includes settlement money designated to reimburse you for past and future medical bills.
- Lost wages. You're entitled to be compensated for lost income while you were off work during recovery. Like the wages you normally receive, the portion of your settlement that reimburses this lost income will be taxable.
- Property damage. You shouldn't have to pay taxes on the amount you receive to repair vehicle damage or replace the vehicle if it's classified as totaled.
- Pain and suffering. If you're awarded compensation for pain and suffering you experienced due to your physical injuries and the trauma of the accident, this amount won't be subject to taxes. However, if you received damages for emotional distress that wasn't a result of your physical injuries, you could have to pay taxes on this amount.
- Punitive damages and interest. If your settlement or judgment includes punitive damages or interest, this money is considered income and taxed. However, it's rare to be awarded punitive damages in car accident cases.