By law, anyone who has been injured due to another party’s negligence has the right to take legal action to recover compensation for their injuries. Many of these personal injury claims arise as a result of car accidents caused by negligent drivers.
If you are seriously injured in a car accident that was not your fault, you may be entitled to compensation for your current and future medical expenses, lost wages, pain and suffering, and more. A New Port Richey car accident attorney can help you fight for the compensation you deserve. But will you have to pay taxes on the compensation you are awarded for your car accident injuries? Keep reading to learn the answer to this question and more.
Is Car Accident Compensation Taxable?
The federal tax laws are incredibly complex. But in general, the compensation you are awarded for physical injuries sustained in a car accident that was not your fault is not taxable. This means you will typically not have to pay taxes on the compensation you are awarded for your car accident injuries—as long as those injuries are physical.
However, there are some exceptions to this rule. For example, if you deducted medical expenses related to your car accident injuries on prior tax returns, the rules are different. In this case, the portion of compensation awarded to you to cover these medical expenses must be included as taxable income.
Is Compensation For Emotional Distress Taxable?
Being injured in a car accident can cause a great deal of emotional distress. For this reason, many car accident victims are awarded compensation for their emotional pain and suffering. If you are awarded compensation for emotional distress, it is not taxable as long as the emotional distress was caused by physical injuries sustained in a car accident.
For example, say you suffer a spinal cord injury in a car accident. The injury drastically reduces the quality of your life, so you experience severe emotional distress. If you are compensated for this emotional distress, it is not taxable since it stems from a physical injury sustained in a car accident.
But if you are not physically injured and you still take legal action to recover compensation for your emotional distress, any compensation you are awarded is taxable. This is because this emotional distress is not linked to a physical injury sustained in a car accident. Instead, you are being compensated solely for the emotional distress you have experienced as a result of the car accident.
Will You Have to Pay Taxes On Punitive Damages?
Punitive damages are rarely awarded in car accident cases. Unlike compensatory damages, these damages are not awarded to compensate the victim for specific expenses or losses, but rather to punish the defendant.
In Florida, a car accident victim can only recover punitive damages if they are able to prove that the at-fault driver acted intentionally or with gross negligence. If this can be proven, the court may award punitive damages to the victim in order to punish the defendant for their egregious conduct.
If you are awarded punitive damages, it’s important to understand that this compensation is taxable. This is true even if you were awarded punitive damages in a case involving physical injuries. You will need to report punitive damages as income when filing your taxes.
Will You Have to Pay Taxes On Interest Earned On Your Personal Injury Settlement?
In some cases, personal injury plaintiffs may earn interest income in addition to the compensation they are awarded for their car accident injuries. For example, if you reach a settlement with the at-fault party’s insurance company, but the company does not pay you within a certain number of days, interest may start to accrue on the settlement.
Will you need to pay taxes on the interest you earn? The short answer to this question is yes. Interest earned on any personal injury settlement is classified as “interest income,” which means it is taxable. This income must be reported on line 2b of Form 1040.
Settlement vs. Verdict: Does It Matter How Your Personal Injury Case is Resolved?
The vast majority of personal injury cases are resolved through private negotiations that take place outside of the courtroom. In fact, this is how about 95% of all personal injury cases are resolved. But some cases will end up in court. This leads many people to wonder whether the tax laws are different for car accident settlements and car accident verdicts.
Will your tax bill vary depending on how your case is resolved? The short answer to this question is no. The tax laws are the same for car accident cases regardless of whether your case is resolved through a settlement or verdict.
The way that you receive payments once you settle a case won’t affect your tax obligation, either. In other words, it also doesn’t matter whether you accept a lump sum payment or periodic payments over time. Either way, the compensation you are awarded for your car accident injuries is treated the same by the IRS, so this shouldn’t affect your decision.
Discuss Your Legal Options With Our Personal Injury Attorneys
Have you been injured in an auto accident in the greater Tampa Bay area? If so, seek legal representation from the skilled car accident attorneys at Carlson Meissner Hart & Hayslett as soon as possible. Since 1971, our team of personal injury attorneys has been committed to helping the injured recover the compensation they are entitled to by law. To date, we have successfully recovered over $115 million in compensation for our clients.
Let our attorneys review the details of your case, explain your rights and legal options, and guide you through the process of fighting for the compensation you deserve. Contact us now to schedule a free consultation regarding your case.