When you receive an accident insurance settlement, you may be feeling pressure due to your extensive financial losses. When your settlement comes in, you may be ready to cover your expenses and rebuild your life. However, it is crucial that you also prepare for potential tax implications.
If you have been involved in a car accident and are expecting a settlement, there may be questions about what is taxed. There are Internal Revenue Service (IRS) regulations about what can and cannot be taxed in a car accident insurance settlement.
Suppose you believe you will be receiving a car accident insurance settlement. In that case, it is a very wise idea to work with a personal injury attorney to help reduce the amount of money you will be required to pay in taxes. At BDIW Law, our Oklahoma car accident lawyers have an in-depth understanding of potential consequences and how your damages need to be categorized so you do not have to worry about unnecessary tax obligations.
Contact us for a free consultation to prepare accordingly.
Do You Have to Pay Taxes on Car Insurance Settlements?
As American citizens, we are required to pay our state and federal taxes. Occasionally, there may be an instance where someone may not realize that monies received are taxable. One of these situations may be car accident insurance settlements.
Some people may not realize that portions of the accident settlement money are taxable. It may be the last thing on your mind, especially if you have had a lengthy trial. It is important to be clear that car accident insurance settlements are generally taxable.
In order to stay within the legal boundaries, you do have to keep this in mind as you do have to pay taxes on certain types of damages. It is very important to understand your settlement claim and to be able to separate the categories accordingly to group them into two different brackets: taxable and not taxable. There are payouts within a car accident insurance settlement that must be claimed on your taxes, so it is vital to understand how to claim these so that you do not have to deal with any problems with the IRS.
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For your settlement, the courts will most likely award multiple benefits under many categories. The total settlement amount will be based on the information and evidence that you provide to the court. You may be entitled to a large settlement amount or a smaller settlement amount; either way, the taxes must be filed properly and according to the regulations.
The parts that are usually taxed include lost wages and income, which can make up a large portion of your settlement. Some of the most common damages you can pay taxes on include:
- Lost wages
- Lost future potential earnings
If you use a portion of your car accident settlement to invest, open up a business, or otherwise generate income, those returns and income are also likely to be taxed by the IRS and state tax agencies. The last thing that anybody would want to deal with is an audit from the IRS. This would mean a full review of your accounts and financial information.
If your taxes are recorded incorrectly, you could end up owing the government a large penalty, including interest. In some extreme cases, it could even mean a sentence of jail time.
Damages that Are Not Subject to Taxes
Under federal regulations, there are categories within the car accident settlement that cannot be taxed. Specific economic damages and non-economic damages that should not be taxed include:
- Appointments with your primary care doctor
- Medical devices and equipment such as prosthetic limbs or wheelchairs
- Prescription medications and co-pays
- Rental car costs and rideshare services
- Pain and suffering
- Mental anguish
- Diminished quality of life
- Physical or occupational therapy
- The diminished value of your vehicle
- Surgical intervention, including reconstructive surgery or skin grafts
- Loss of companionship, support, guidance, love, society, and advice
- Reputational damages
- Emergency room bills
- Property damage
- Skin scarring and disfigurement
- Loss of household services, including child care costs and hiring household maintenance help
- Lab work and diagnostic testing
- Costs of purchasing a new vehicle
Most of these non-taxable items will be the bulk of your settlement. The last thing you want to do is pay out more money than you are required to in taxes. Hiring an experienced personal injury attorney is a great way to relieve any pressure or nervousness that may come with trying to figure out how to maximize what you keep in your pocket after your car accident insurance settlement comes in.
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How an Experienced Personal Injury Attorney Can Help
There are many regulations regarding including your car accident settlement with your filed taxes. Hiring an attorney to assist you with the complicated process is a very good idea.
As we have reviewed, there could be stiff penalties for incorrectly filing your taxes. The best way to avoid any issues is to work with an experienced personal injury attorney.
The attorney will be able to explain why damages should be categorized in specific ways to help you stay on good terms with the IRS and avoid harsh tax implications.
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Contact BDIW Law for a Free Consultation Today
When you are getting a sizable car accident insurance settlement, these funds could change your life and give you the opportunity to put this traumatic experience behind you. Your damages must be categorized accurately if you hope to pay only what is legally required in state and federal taxes.
BDIW Law has proven and knowledgeable car accident attorneys to help you through the claims process. Although settlements and taxes can be a complex situation, at BDIW Law, we set your mind at ease. Contact our legal team today for a free, no-obligation case consultation.
Our personal injury law firm is top-rated and has over 65 years of experience demanding justice for our clients. We are based in Oklahoma, serving clients throughout Ponca City and its surrounding areas. Do not hesitate to call us or complete our online contact form to schedule your free consultation today.
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