A large settlement from your insurance company or a winning judgement in a lawsuit can be a blessing after a car accident. You'll be able to pay your medical bills and catch up with any bills you've fallen behind on due to lost wages. But will you owe the IRS any of the money that you win in a lawsuit or gain from an insurance settlement? A lot depends on what you were awarded money for. Take a look at the different types of awards you might receive in an insurance settlement or auto accident lawsuit, and find out how to determine what you'll owe the IRS.
Medical Bill Reimbursement
When you've suffered a serious injury, paying off your mounting medical bills is liable to be among your top concerns. You'll be happy to know that, usually, money that you receive as part of a settlement or lawsuit judgement that is earmarked for medical bills won't be subject to taxes.
However, there is one exception to this rule. If you paid your medical bills out of your own pocket, took a tax deduction on them when you filed your taxes at the end of the year, and then received reimbursement in a lawsuit that settled after you filed your taxes, then you will owe, because you've already received a deduction for that money. In that case, failing to pay taxes on your award would result in you receiving the same tax benefit twice.
Compensation for Lost Wages
If you weren't able to work for some period of time following the accident, you may receive some amount of money to compensate you for your lost wages. You can definitely expect to pay taxes on this money.
If you had been able to work, then the money that you would have made from your job would have been taxed at the usual rate. Therefore, money that you're awarded in lieu of your wages will be taxed in the same way.
Payment for Property Damage
If your car was damaged or destroyed, the chances are good that part of settlement will be money that's intended to repair or replace your vehicle. That money is not taxable. If you were taking money out of your savings account to pay for a new vehicle or for vehicle repairs, you wouldn't owe taxes on it – you would have already paid taxes on it from your earnings. This is the same concept.
Pain and Suffering Award
A pain and suffering award is one of the more complicated awards when it comes to taxes. Whether or not your pain and suffering award is taxable depends largely on what form your pain and suffering takes. If you receive an award for physical pain and suffering – for example, if you're experiencing ongoing back pain that affects your quality of life – the award will not be counted as income and will not be taxable.
However, if your pain and suffering takes the form of emotional distress – for example, if you experience depression or excessive fearfulness as the result of your accident – then your award will be counted as income and taxed. If you end up receiving a pain and suffering award based on both physical pain and emotional distress, it's a good idea to go over your award carefully with your lawyer and with an accountant to determine how much you owe in taxes.
One more possible type of award that you could receive is an award for punitive damages. Typically, these are awarded when the judge or jury determines that being forced to pay a large amount of money will prevent the defendant from engaging in reckless or damaging behavior.
You're not likely to receive punitive damages from an insurance settlement or lawsuit against an individual driver. However, if you were in an accident with a commercial truck, for example, and you sued the trucking company for failing to observe best driving practices and causing the accident, you could possibly receive punitive damages. In that case, your punitive damages would be considered income, and would be taxable.
An experienced personal injury attorney should be able to help you learn more about which parts of your settlement are taxable and which parts are not. You should also work with an accountant to be certain that you're not paying any more or less than you're legally obligated to pay.