When it comes to the car accident settlement process, many people are unsure as to whether their personal injury settlements are taxable and whether they need to report their settlements on their tax returns.. Generally, the answer is “no,” as lawmakers tend to believe that it is poor public policy to tax the monetary compensation of an injured accident victim. However, there are certain exceptions that have been put in place by the Internal Revenue Service (IRS).
Applicable IRS Rule
The IRS rules governing personal injury settlements and the car accident settlement process are extremely detailed. However, the following is a brief synopsis of which types of monetary recovery obtained in a car accident are taxable and which are non-taxable:
Medical Care and Treatment – Non-Taxable
Many people file a claim or lawsuit arising out of a car accident in order to pursue monetary compensation for the injuries they suffered in their accident. Some injuries (such as spinal cord injuries, head injuries, and bone fractures) are more severe than others (such as muscle contusions). Following a car accident, the accident victim may have to undergo a medical procedure (such as surgery), seek medical treatment, or endure painful rehabilitation (such as physical therapy). All of these types of medical treatment are costly. If the accident victim receives a monetary settlement or jury verdict for injuries they suffered in a car accident, the accident victim does include compensation received for pain and suffering, or for medical care, as part of gross income on a tax return.
Mental Distress – Non-Taxable
In a particularly serious car accident, an accident victim may suffer severe mental distress. They may even be affected to such an extent that they are afraid to operate or ride in a motor vehicle. Juries sometimes award monetary compensation for mental anguish and emotional distress stemming from a car accident. Under the IRS rules, damages that a car accident victim recovers specifically for emotional distress (such as by way of a settlement or jury verdict) are excluded if they are attributable to an illness or physical injury. Otherwise, these damages are not typically excluded from a person’s income.
Punitive Damages – Taxable
Punitive damages are awarded in car accident cases when it is determined that the at-fault driver behaved in a particularly reckless or egregious manner, such as operating a vehicle under the influence of alcohol or drugs at the time of the accident. The primary purpose of awarding punitive damages is to punish the at-fault driver directly and to discourage other drivers from acting in the same way under similar circumstances. According to the IRS rules, punitive damages are not generally excluded but must be counted in victims’ gross income.
Call USClaims Today
The car accident settlement process can often be lengthy, and it may take many months before you can obtain a favorable settlement offer or a favorable jury award at trial. In the meantime, you may be cash-strapped and unable to avoid high medical bills and out-of-pocket expenses during the time you are receiving treatment for your injuries and recovering. Such times can be challenging and full of anxiety.
At USClaims, we offer pre-settlement funding services to people injured by the negligence of others. If you have been injured and expect to receive compensation, we buy out a portion of the anticipated proceeds of a settlement or jury award in order to provide you with some cash immediately. Best of all, we only get paid if your case is won or you successfully reach a settlement. Apply now or call us today at 1-877-USCLAIMS to learn more.