After the shock of a car accident and the stress of recovery, finally receiving a settlement can feel like a huge relief. However, another question often arises: Is a car accident settlement considered taxable income?
Not every part of a settlement is treated the same way. Some parts may be tax-free, while others might be subject to taxes, especially if they involve things like lost wages or punitive damages.
Tax laws can be complicated; that’s where having the right legal support can make all the difference. At Savage, Royall & Sheheen, LLP, our Camden car accident lawyers helped many clients in South Carolina understand their car accident settlements and avoid unexpected tax issues. We know how confusing this process can be, and we’re here to walk you through it step by step.
Understanding Car Accident Settlements
A car accident settlement is essentially an agreement between you (the injured party) and the insurance company or at-fault party. Instead of going to trial, both sides agree on a settlement amount to resolve the claim.
Every accident is different, so every settlement is, too. Some may be relatively straightforward, while others may involve serious injuries and long-term consequences. The more severe and complex the injury, the more detailed the settlement typically becomes.
Others may be driven by financial hardship caused by time away from work. In rare cases, your settlement might also include punitive damages meant to punish that behavior.
Before accepting a settlement, it’s crucial to fully understand what it covers, how it’s structured, and how it may affect you financially moving forward. That’s why it’s essential to work with an experienced car accident attorney who can help break it all down and ensure their best interests are protected.
Is a Car Accident Settlement Taxable Income?
According to IRS guidelines, the portion of your settlement meant to compensate for physical injuries or medical expenses is not taxable. The IRS doesn’t treat money meant to “make you whole” for a physical injury as income. So if your settlement reimburses you for hospital bills, surgeries, or therapy after the crash, you likely won’t owe taxes on that part.
However, there are a few exceptions:
- Lost Wages: If your settlement includes compensation for lost income, the IRS may treat that portion as taxable because your regular wages would have been taxed if you had earned them normally.
- Punitive Damages: These are rare in car accident cases but are always taxable.
- Emotional Distress: If not tied directly to a physical injury, this compensation may be taxable.
Report a Car Accident Settlement on Your Taxes
If the money you received was strictly for physical injuries or medical treatment, you don’t need to report it. But if any part of your settlement included lost wages, emotional distress not tied to a physical injury, or punitive damages, then that portion might be taxable and should be reported.
Here’s what you can do to stay on the safe side:
1. Review Your Settlement Agreement
This document should outline what each part of the payment was intended to cover. That breakdown matters when it comes to your taxes.
2. Keep Your Paperwork
Keep your medical bills, legal correspondence, and any letters from the insurance company. They can help you explain your settlement if the IRS ever asks questions.
3. Talk to a Tax Professional
An accountant can help you figure out exactly what needs to be reported and what doesn’t. It’s always better to double-check than to make assumptions.
How a Car Accident Lawyer Can Help
An experienced attorney doesn’t just fight to get you compensated; they work to ensure you’re treated fairly every step of the way. That includes helping you understand what your settlement covers and the potential long-term financial impact, including how it may affect your taxes.
Here’s how a lawyer can help:
Understand the True Value of Your Claim
Insurance companies are trained to settle claims quickly and for as little money as possible. Without legal guidance, you may not realize the full value of your case, especially if your injuries result in long-term pain, disability, or lost income. We work closely with medical professionals, economists, and other experts to determine what your case is worth.
Negotiate With the Insurance Company
Insurance adjusters are working to protect the company’s bottom line. Our attorneys are familiar with the tactics insurers use to undervalue or deny claims, and we know how to effectively push back. We’ll handle all communication with the insurance company, so you can avoid being pressured into accepting a lowball offer.
Make Sense of Settlement Terms, Including Taxes
Car accident settlements can involve various types of damages. Each of these may be treated differently when it comes to taxation. We help you understand what parts of your settlement could potentially be taxable, and we structure settlement agreements carefully to make sure your financial interests are protected.
Provide Support and Guidance Throughout the Process
Our attorneys offer compassionate and straightforward support throughout every stage of your case. We’re here to answer your questions, explain your options, and make sure you feel informed every step of the way.
Contact a Car Accident Attorney in South Carolina
Paying taxes on auto accident settlements isn’t always straightforward. That’s why it’s helpful to fully understand what your settlement includes and to keep all the paperwork that shows how the money was allocated.
If you’ve been injured in a car accident in South Carolina and are worried about the legal or tax implications of your settlement, we’re here to help. The attorneys at Savage, Royall & Sheheen, LLP understand the emotional, physical, and financial toll a car accident can take.
Contact us at 803-432-4391 to request a consultation and get the answers you need.