If you have been injured in a car accident that is someone else’s fault, you may be entitled to receive compensation from that person under Louisiana’s personal injury laws. When you receive a car accident settlement, you need to consult with your tax advisor regarding income taxes due on the settlement amount. Below is a brief discussion of this topic. We urge you to contact our office for more information.
Paying Income Taxes on a Car Accident Settlement
The purpose of your car accident settlement is to compensate you for your losses. This is the best the law can do because the courts cannot undo the damage caused by a car accident. Therefore, most car accident settlements are non-taxable because they are compensating you for your physical injuries. However, your car accident settlement must be directly related to the physical injuries you sustained in the car accident to be non-taxable.
The Internal Revenue Service’s instructions regarding personal injury settlements states:
“If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income.” [IRS Publication 4345 Rev. 4-2015]
The exception to the non-taxable rule is if you deducted medical expenses related to the injuries sustained in the car crash. If so, you must pay income taxes on the portion of the settlement that reimburses you for the medical expenses you deducted on your tax return.
In addition to the medical expense deduction exception, there are several other exceptions that result in a portion of your car accident settlement being taxable as income.
Compensation for Lost Income
The portion of your car accident settlement that reimburses you for lost wages and loss of income is taxable. The reasoning is that if you had not been injured in a car accident, you would have paid taxes on the income you earned. Therefore, you should pay income taxes on that portion of your car accident settlement that compensates you for lost income.
Most car accident settlements include an amount for emotional distress. The IRS does not tax this portion of your car accident settlement provided that the emotional distress you experienced is a direct result of the physical injury sustained in the car accident.
Punitive damages are paid in some cases when the other party was grossly negligent in causing the car accident. Punitive damages are intended to “punish” the other driver for gross negligence. If you receive punitive damages, you must pay income taxes on the amount of your car accident settlement designated as punitive damages.
Call a New Orleans Car Accident Law Firm
An experienced NoLA car accident attorney may be able to structure your car accident settlement to minimize the taxable portion of the settlement. If you have been injured in a motor vehicle accident, contact The Olinde Firm by calling (504) 587-1440 or 1-800-587-1889 to schedule a free legal consultation.