Do You Have to Pay Taxes on Car Accident Settlements?

By Jose Ceja
Managing Attorney

When you have been injured in a car accident, it can greatly impact your finances. Not only do you have to fix any damage to your vehicle, but you also have the stress of medical bills and lost wages. That’s why obtaining compensation in the form of a settlement from those responsible can be of great help. But do you have to pay taxes on that settlement? Here’s what to know.

The good news is that most car accident settlements are tax deductible, meaning you do not have to pay taxes on them. However, the IRS does have some exceptions. It comes down to the reason for the payment and the structure of your settlement. 

When Are Settlements Tax Deductible?

When you receive compensation for any general and compensatory damages (think: your medical bills and any pain and suffering), it’s tax deductible. But under IRS regulations you may only deduct medical costs totaling more than 10% of your adjusted gross income, or if you are 65 or older, 7.5%. 

It’s important to distinguish whether or not you wrote your medical bills off as a tax deduction some time during the previous tax year. If so, you will have to pay taxes on the settlement you receive.

Compensation for vehicle damage from the accident is tax deductible and includes not only repairs but also things for your vehicle that are directly related to the accident such as rental cars. 

When Are Settlements Taxable?

If medical bills, pain and suffering, and expenses for damage to your vehicle are tax deductible, then which settlements are taxable? There are four things you may be compensated for that you will be taxed on. These include:

  1. Lost wages;
  2. Emotional distress;
  3. Punitive damages; and
  4. Any interest on what you are awarded.

Lost Wages – you will be responsible for paying taxes on lost wages because your income would ordinarily be subject to income tax. Since you are essentially receiving what would have been your income in the first place, you must pay taxes on it.

Emotional Distress – The IRS generally holds any compensation for emotional distress as taxable. Emotional distress is considered differently than pain and suffering, because while pain and suffering occurs as a direct result of an accident, emotional distress can often have many factors and occur not only as a result of the accident. For instance, anxiety and depression caused by an accident are considered pain and suffering and therefore not taxable, but a fear of driving is considered emotional distress and is taxable. 

Punitive Damages – Punitive damages, which are intended as a punishment for the individual found liable, are relatively rare. They are only awarded when there is reckless action with little regard for human life. Punitive damages are taxable. 

The Attorneys at Ceja Law Firm Help Those in Houston Who Have Been Injured in a Car Accident

If you or a loved one has been injured in a car accident due to the recklessness or negligence of another, it’s vital that you understand to what you are entitled under the law. With this information under your belt, you can make the important decisions regarding how you want to move forward. That’s why it’s in your best interest to consult with a knowledgeable and experienced Texas personal injury attorney.

At Ceja Law Firm PLLC, we understand the impact that a car accident can have on many parts of your life and the importance of properly dealing with such negligence or recklessness. That’s why we will work to get you the compensation that you deserve. To learn more or to schedule a free consultation, contact us today!

About the Author
Jose Ceja is the managing attorney of Ceja Law Firm. He has practiced law since 2007 and has devoted his career to the practice of criminal law. Mr. Ceja began his legal career as a felony drug prosecutor, where he prosecuted drug, gang, and violent offenses. Mr. Ceja has first or second chaired almost 100 trials, including murders, drug cases, DWIs, and assaults. In his career as a defense attorney, he has regularly obtained dismissals, not guilty verdicts, and grand jury “no bills” in a wide variety of cases.