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Do I Need to Pay Tax on a Vehicle Accident Settlement or Judgment?

Do I Need to Pay Tax on a Vehicle Accident Settlement or Judgment?
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Why Paying Tax on A Vehicle Settlement or Judgment is Necessary – A Brief Overview

When many receive their accident settlement or a judgment in the form of compensation, they often forget that it may be taxable. It is general and handy knowledge to assume that any form of income or compensation may most likely require taxation. However, in the scenario of a vehicle accident, this isn’t always the case. Actually, across most judgments and settlements, tax payments are not always required. 

Should You or Should You Not Pay Tax?

Because the Internal Revenue Service (IRS) regulated that “damages received on account of personal physical injuries or physical sickness” and “emotional distress” all fall into the category of reimbursed financial loss, these items are not taxable. While these are excluded as non-taxable income, some other forms of compensation may need review for taxation. 

Examples of Non-Taxable Compensation

On the occasion that compensatory damage is for medical expenses due to vehicle injury, it falls into the non-taxable category. This is because the victim suffered due to the accident or injury and may even have had wage or job loss tied to this personal offense. The main purpose for this amount being shielded from taxes is because the compensation is reimbursing the individual for the entirety of the damage. Property damage also is included as non-taxable income so that the property can be restored or renovated to reverse the destruction that occurred. Vehicle accidents resulting in injury and property damage also fall underneath this category and are not subject to taxes.

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Example of Money Received That is Taxed

The most likely form of compensation that can be taxed will be for lost income, even if it is due to vehicle injury. This accident settlement or judgment is based on the fact that the plaintiff’s normal wages are taxable, so the compensation for lost wages will be too. Monetary income will be taxed just the same as any ordinary income. Suppose the compensation for lost income is lumped in with medical bills, property damage, or other financial loss. In that case, only the amount that is partitioned for lost wages will be the taxable portion. In the case of punitive damage, which is rare but can happen, this amount of compensation is also taxable. Generally, punitive damage as punishment for misbehavior, and compensation to reverse the damage done is typically taxed.

Additional Help on Taxed Vehicle Accident Judgments or Settlements

Despite there being two distinct categories of taxable and non-taxable income, some lines may be crossed regarding whether income is taxed or not. While most cases of punitive damage are taxable, this isn’t always true. On the other hand, most compensatory damage forms are non-taxable, but there may be one unusual occasion where tax is required. For this reason, is it best to consult professional advice and guidance on tax requirements for vehicle accident settlement or judgment? Fasig & Brooks is an authority in the field and will provide knowledgeable advice to further guide plaintiffs on this subject matter. 

*Authoritative sources: 

26 U.S. Code § 104 – Compensation for injuries or sickness

Featured Image by Valter Cirillo from Pixabay