Some of your settlement probably is taxable; some of it probably is not. We outline the general tax rules here, but you are encouraged to seek the services of an accountant for advice that is specific to your unique situation.
Compensatory vs. Non-Compensatory Damages
Compensatory damages are intended to make you “whole” after your accident—to restore you to the condition you’d be in had you not been the victim in a car crash. Such damages reimburse you for the money you’ve lost or will lose as a result of your injuries/property damage. Compensatory damages aren’t taxable and don’t have to be claimed as income.
Non-compensatory damages give you compensation you wouldn’t have had if you hadn’t been in an accident. They are taxable and should be claimed as income.
Medical Expenses Reltated To Your Car Accident
Money that you receive as reimbursement for present/future medical expenses to treat physical injuries/sickness resulting from your accident is compensatory and generally not taxable. There is, however, one exception to this rule.
Some personal injury cases take time to settle, so you might not receive your award in the same year that you were injured and filed your claim. If you took an itemized tax deduction for medical expenses related to the injuries/sickness resulting from your accident in the year(s) previous to the year in which you receive your settlement, the tax benefit you received from that deduction is taxable and should be claimed as “other income” on your tax return.
Money that you receive to reimburse you for damage to or the total loss of your vehicle or any other property damaged or destroyed in the accident is also compensatory and generally not taxable. If, however, your award for property damage exceeds the value of the property lost or damaged, that excess amount is considered taxable income and must be claimed as such on your tax return.
If you receive compensation for wages lost due to time off work after your accident, that money is not considered compensatory. Had you not been injured in a car crash, you would’ve been working to earn this money, and it would’ve been taxable income; therefore, this portion of your award is taxable and should be claimed on your return.
If a portion of your settlement reimburses you for profits lost due to your inability to operate your business after your accident, that portion is considered taxable business income and should be claimed on your tax return.
Pain and Suffering
Your compensation for pain and suffering is generally not taxable as long as you can show that it resulted directly from the injuries you sustained in the accident. An experienced lawyer can use your medical evidence to demonstrate the connection convincingly to the insurance company or the court.
This is a little bit trickier than physical pain and suffering. Emotional/psychological trauma might not be taxable if you can show that it reasonably resulted from the injuries you suffered in the accident. For example, if your car was hit by a semi-truck on an Interstate highway, you might have sustained catastrophic injuries and now feel terrified to drive on the Interstate with trucks racing by at high speeds. As a result, you might have to take other, slower routes to get where you’re going each day.
Your attorney could call in an expert witness like a psychiatrist or psychologist to testify that you’re suffering from post-traumatic stress syndrome (PTSD) as a direct result of your accident. If you don’t establish this kind of connection convincingly, you might have to pay taxes on the portion of your settlement that compensates you for emotional/psychological trauma. The services of a lawyer are highly recommended in such a case.
In some cases, you might be awarded punitive damages if the driver who caused your accident did so intentionally or through very reckless behavior—like drunk driving. The court could order the defendant to pay you extra money beyond your compensatory damages. Punitive damages are generally considered taxable and should be claimed as “other income.”
Have You Been Injured In A Charleston South Carolina Area Car Accident?
If you've been injured in a car accident you should speak with a car accident lawyer as soon as possible. Contact us online or call our Charleston, South Carolina office directly at 843.488.2359 to schedule your consultation. We are also able to meet clients at our Conway, Myrtle Beach, Murrells Inlet, Mt. Pleasant, North Myrtle Beach or North Charleston office locations.