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Are Car Accident Settlements Subject To Taxes?

Wrecked car

Nobody likes paying taxes. Taxes are a necessary evil and a part of life, but they can also be very complex the minute you step outside of the basic income taxes your job withholds every paycheck. Few things can be more confusing than the amount of taxes you need to pay on your car accident settlement.

Still, knowing which parts of your auto accident award are taxable is essential to remaining above board when tax season rolls around. Discover how car accident settlements and judgments work, when you’ll need to pay taxes on them, and how a car accident lawyer is your best bet.

Compensatory Damages

There’s basically two kinds of damages you’ll get in a car accident award. The first are special damages, which are those damages that can be easily quantified — the cost of your hospital bills, for example. The second are general damages, which refer to things that are more subjective, like pain and suffering and loss of consortium.

Most damages you’ll get awarded in a car accident case are compensatory. That means they’re designed to pay you back for a loss. These can be the payments that cover your medical bills, your transportation to and from rehab, job training costs, and damage to your vehicle or property, among other things. Since they’re paying you back for a direct loss, they’re generally not taxable by the IRS.

Wages and Compensation

Damages you are awarded for lost wages and potential future earnings potential, on the other hand, aren’t strictly compensatory. Rather, they’re replacement income. This means they fill the role that normally your job would fill. You’ll use them for paying bills and the like, but since they are essentially a replacement for your regular paycheck, these awards are taxable by the IRS, at a standard income tax rate based on whatever tax bracket you happen to occupy.

Punitive Damages

Punitive damages are a third classification all on their own. They are also exceptionally rare in terms of awards. Punitive damages are only handed down in the most egregious or brutal of cases. They represent incompetence, irresponsibility or deliberate actions that are so heinous, the perpetrator deserves to be punished for them. By awarding extra money, this increases the burden on the defendant while sending a clear message to never do something like this again.

Since punitive damages don’t compensate you directly for a loss, and they represent a sort of “bonus” sum of money that you can use for whatever you like, they are directly taxable as income by the IRS.

When You Need a Car Accident Attorney

Of course, when you’re hurt in an auto accident, the first thing you want to think about is getting compensation, not whether you’ll have to pay taxes on part of it. Getting the best shot at compensation for injuries you suffer in this kind of accident requires representation from an experienced car accident attorney.

If you live in the Mobile, Alabama, area and have been hurt by an irresponsible driver, Andy Citrin Injury Attorneys can help. We have years of experience helping victims get the compensation they deserve. Contact us for a free consultation on your case today.