Are Car Accident Settlements Taxable?

With the deadline for filing your 2020 federal income taxes fast approaching, you may be wondering if your car accident settlement is taxable. While the purpose of your compensation was to cover the damages you suffered physically, emotionally, and financially, typically, taxes are not owed. The Internal Revenue Service (IRS) treats these payments as exempt since they are neither wages nor salary. But, like anything in government, there are exceptions.

Settlements Involving Physical Injuries

Before digging into the exceptions, let us first review the IRS guideline for car accident settlements and other personal injury compensation payments. Publication 4345, Rev. 4-2019 states that settlements received for physical injuries where you do not take a deduction for related medical expenses are non-taxable for the total amount. However, if you did take a tax deduction for related medical costs in previous years, you will have to include the portion of your settlement that covered those costs. Essentially, you cannot double-dip on the tax benefit. 

In addition to this rule, there are times when your car accident settlement is taxable. Specifically, any compensation you receive must be related to a particular physical injury. This typically applies to the lost wages portion of the award you received. 

Taxing Compensation for Lost Wages and Income

After sustaining injuries in a car accident, you likely missed work or possibly could not return. Your settlement agreement would have included a portion as compensation for this lost income. Because you would have paid taxes on this money had you not been injured, it is considered taxable by the IRS. When doing your taxes, make sure to speak with your attorney and determine what part of your award was earmarked for lost wages. Compensation for lost wages and income in a personal injury settlement is taxable. 

Other Taxable Components of an Ohio Car Accident Settlement

Generally, the IRS does not require tax to be paid for compensation related to mental anguish or emotional distress, so long as from a physical injury. If not, you will need to find out how much of your settlement was for non-related distress, though some of it may be tax-deductible. 

Like those that are punitive, other special damages are usually only paid in certain types of personal injury claims. This type of award is given when another party's actions were so reckless or egregiously negligent that the court wants to punish them further by financially rewarding the victim. Because this compensation is based on the at-fault party's behavior and not your injuries, the IRS deems it taxable. 

Speak with an Experienced Ohio Car Accident Attorney About Your Settlement

If you received a car accident claim settlement in 2020 but are not sure if any part of it is taxable, speak with a car accident lawyer with Diehl & Hubbell right away. Diehl & Hubbell has a reputation that you can trust to ensure you get the fair compensation you deserve. We are easily accessible for anyone in Southwestern Ohio, including Lebanon, Hillsboro, Wilmington, and Hamilton. Contact our office online or call us to schedule a free initial consultation.


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