Paying taxes based on car accident compensation varies, depending on the type of compensation you received. Also, for tax purposes, does it matter whether your case settled or went to court?
Whether a settlement or trial resulted in compensation, federal tax rules are the same.
For the most part, the IRS does not include compensation for injuries or sickness as part of your gross income. This means it does not tax you for the money received to cover your medical bills and accident expenses. If the court or lawsuit awards you money for pain and suffering, you do not have to pay taxes on this compensation either.
The IRS does not tax you for compensation received to cover vehicle damage. This includes repair costs along with financial reimbursement for using a rental car while your car is under repair.
Yes, settlements or court awarded compensation for lost income is taxable. The reason for this is that if you were able to work, your work would’ve resulted in taxable income. Compensation from an accident that replaces this lost income is therefore considered gross income.
One other type of compensation that the IRS collects taxes on are punitive damages that courts award. Punitive damages have the purpose of punishing the at-fault party and also of deterring future similar behavior. Compared with other types of compensation, courts rarely award punitive damages. It requires extreme circumstances, such as egregious actions on the part of the defendant. In most cases, the IRS will require you to pay taxes on punitive damages.
It is best to consult with a tax consultant about compensation received in an accident case. This way you can be sure you follow IRS rules along with state income tax laws.
Our attorneys at Sackstein, Sackstein & Lee, LLP can answer your questions in a free consultation and determine whether grounds exist to sue. Call us at 516-248-2234 or 718-539-3100 or reach out to us through our contact form.