Are Car Accident Settlements Taxable?

If you receive a settlement from a personal injury case involving a car accident, you might be wondering if you owe any taxes on your settlement earnings.

According to the IRS, if you receive a settlement due to physical injuries or sickness, and don’t take an itemized deduction for medical expenses due to the injury, your settlement isn’t taxable.

So, are car accident settlements taxable?

However, there are some exceptions to this rule depending on the details of your personal injury case.

In this article, we will explore the different factors in your case that affect the taxability of your settlement earnings.

What Portion of My Car Accident Settlement is Taxable?

Your car accident settlement may be taxable in certain instances.

The type of compensation the IRS finds taxable in personal injury cases includes:

• Lost wages;
• Damages due to emotional distress;
• Punitive damages; and
• Interest earned on a settlement.

Since lost wages replace what you would have earned working, the IRS considers this type of compensation as regular wages.

In fact, the IRS taxes compensation for lost wages similarly to regular wages.

However, if you receive multiple years of lost wages in your settlement, you might be taxed as part of a different tax bracket.

For example, if you usually earn $30,000 per year and you receive $90,000 of lost wages in your settlement, your federal tax bracket changes from a 12% income tax rate to 24%.

What Parts of My Car Accident Settlement are Tax-Exempt?

Usually, compensation for physical injury isn’t taxable in a car accident settlement.

Whether you settle your case before or after filing a lawsuit, you don’t have to pay taxes on your settlement earnings. 

Generally, any damages you recover as a result of an injury or illness aren’t taxable at the state or federal level.

This includes pain and suffering in many cases.

How to Reduce Your Car Accident Settlement Tax Obligation

If you work with an attorney, you might be able to reduce or even eliminate your tax obligation.

To reduce the number of taxable earnings in your settlement, ensure that you classify your damages carefully. 

You might also consider exploring structured settlements instead of a lump sum settlement.

Since structured settlements split your compensation into multiple installments, you may be able to exclude some of your auto accident settlement earnings from your current tax year.

Need Help Paying Bills While Waiting for a Settlement? Apply for Funding Through Ally Lawsuit Loans Today

If you sustain injuries in a car accident, you might not know how to keep financially afloat while you recover.

While waiting for your personal injury settlement, expenses like medical bills, attorneys fees, rent, and more might pile up, especially if you're unable to work.

If you ever find yourself in this position, consider pre-settlement legal funding from Ally Lawsuit Loans.

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If you would like to apply for a lawsuit loan or want to know if your potential car accident settlement is taxable, give us a call at 844-545-6246. We deliver cash to applicants within 24 hours of approval.