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


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5/1/2015
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Like most people who are awarded a judgment or settlement after being injured in a motor vehicle accident and working with a Baltimore personal injury law firm, you're probably wondering whether or not you'll have to pay taxes on the money you receive. The odds of this are very slim. In the vast majority of instances, recipients of vehicle accident settlements and judgments don't owe taxes. However, as with any tax-related situation, there are exceptions. Assuming you don't could lead to very serious trouble. The specific nature and circumstances of your case will ultimately dictate whether or not the proceeds from your settlement or judgment are taxable. The following information does not constitute tax advice. For that, you must work with a qualified tax adviser. Use the information below to come up with pertinent questions to ask the adviser when you meet with them.

Tax rules regarding judgments and settlements are usually identical. In other words, you will likely face the same tax consequences whether you received a judgment following a trial or if you received a settlement from the claims process.

IRS Regulations Regarding Personal Injury Settlements and Judgments

The first step in determining whether or not your settlement or judgment is taxable is to familiarize yourself with information directly from the IRS. Consult IRS regulation 26 C.F.R. 1 - §1.104-1 "Compensation for injuries or sickness." This regulation states that in general, any damages - other than punitive - that are received as a result of physical injury or illness are excluded from gross income and, therefore, not taxable. The regulation goes on to point out that emotional distress is not included, but it is excluded from gross income in a different section of the tax code.

Compensation for Medical Expenses and Injuries

The vast majority of judgments and settlements are strictly compensatory or only award general damages. They most typically compensate victims for things like lost wages, medical expenses, and pain and suffering. Because you're being reimbursed for money you were forced to spend, the proceeds are not typically subject to tax. Your Baltimore personal injury lawyer can help you build a case demonstrating how much your injury has cost you.

Compensation for Vehicle and Property Damages

The rules regarding taxes for settlements or judgments related to vehicle and property damages mirror those for medical expenses and injuries. You're being compensated, or paid back, for the cost of repairs and even rental car fees. You've essentially already paid for these problems, so the money you receive most likely will not be taxable.

Compensation for Loss of Income

Unlike the other two categories, compensation for loss of income through a settlement or judgment is almost always taxable. It is considered income because it is being paid to you to replace the income you were unable to collect due to your injuries. As such, it is income, and taxes must be paid on it. It is not always easy to prove you are owed compensation for lost wages, but a skilled Baltimore personal injury lawyer can help. Please note that if just part of your settlement or judgment is for loss of income, that part most likely will be subject to tax.

Punitive Damages

Punitive damages are exceedingly rare in personal injury judgments and settlements. These damages serve as punishment for the defendant, and they are usually only awarded when the defendant's actions have been particularly egregious or outrageous. It is very unlikely that your judgment or settlement will include punitive damages. If it does, however, you will almost certainly have to pay taxes on the proceeds because you are not being compensated for money you've spent.

Retain a Skilled Baltimore Personal Injury Law Firm

Before looking for a tax adviser to help you determine whether or not your settlement or judgment is subject to tax, you need to win your case. The first step to doing so is hiring an experienced personal injury attorney. This should be done right after receiving medical attention following your injury. Later, once your case has been won, your tax adviser can assist you with the financial end of things. Call the Law Offices of James Lee Katz, P.A., a Baltimore personal injury law firm, at (443) 394-0900 today. 



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