If you have recently won a settlement after a car accident, you might wonder how taxes factor in. While most settlements don’t require you to pay taxes, it really depends on the specific nature of your case and judgment. Continue reading this blog for more information on taxes, your settlement and lawsuit loans.
The Tax Code and My Settlement
The Internal Revenue Service (or IRS) mentions taxability of settlements in 1.104-1 Compensation for injuries or sickness.
(c) Damages received on account of personal physical injuries or physical sickness—(1) In general. Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2). Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care (described in section 213(d)(1)(A) or (B)) for emotional distress.
A majority of settlements cover “compensatory damages” and “general damages.” These damages compensate the plaintiff for medical expenses, lost wages and pain and suffering caused by the injuries.
Settlements typically comprise only of compensatory and general damages, which are usually not subject to taxes. This is because these settlements or judgments are meant to reimburse you for out-of-pocket losses.
Vehicle and Property Damages
If your settlement includes compensation towards vehicle repair resulting from a car accident, it is not taxable. This includes any coverage for the costs of repairs as well as rental car reimbursement.
If your settlement or judgement covers compensation for lost income, it is generally subject to income tax. This is because your original income would have been taxable if you did not experience lost income, which means that any replacement of lost income should also be taxable.
Punitive damages, or punishment against the defendant, are rare and include personal injury damages as a result of the defendant’s particularly outrageous or egregious behavior. If you happen to receive punitive damages in your personal injury case, note that they are almost always taxable.
Uplift Legal Funding
If you are in the midst of a personal injury lawsuit, consult your lawyer and a tax professional to learn about the taxability of your settlement or judgment.
Uplift Legal Funding is here to offer financial support to personal injury plaintiffs so that they are able to go up against the defendant. We essentially claim a part of the plaintiff’s lawsuit winnings, and are only able to collect if the plaintiff actually wins the case.
Uplift Legal Funding prides ourselves on reliable customer service, and we are readily available to guide you through our three step application process. With us, plaintiffs will experience complete transparency and fast cash transfer.