In general, car accident settlements and judgments are not taxable. However, as with many areas of the law, there are exceptions to this rule. Depending on what you are being compensated for, you could owe taxes on some portions of what you receive.
Example of a Possible Settlement of a Rhode Island Car Accident
If a negligent driver caused your car accident, you are entitled to be compensated for your medical bills, lost wages, property damage, and pain and suffering. If the at-fault motorist’s actions were especially egregious, you might be awarded punitive damages to punish him. Here is an example of what a victim could receive in his settlement:
- $20,000 medical expenses
- $35,000 lost wages
- $75,000 pain and suffering
- $12,000 property damage
What Parts of a Settlement Can Be Taxed?
The amount you receive is not treated differently if it is through a settlement or jury trial for tax purposes. Here’s what is taxed and not taxed:
Reimbursement for medical expenses is not taxable unless you took a deduction for out-of-pocket expenses on your income tax return. In that case, the reimbursement you receive is taxed.
You will owe taxes on the lost wages portion of your settlement because it reimburses you for work income you did not receive while you were recovering from your injuries.
Compensation for your vehicle or other property repair or replacement costs is not taxable.
Pain and suffering.
Taxing pain and suffering damages is complex. If your pain and suffering is due to a physical injury, it is generally not taxable. However, if you are receiving it to compensate you for emotional distress, such as anxiety, depression, or post-traumatic stress disorder, this would not be considered a physical injury. You would owe taxes on this portion of your settlement.
You would owe taxes on any punitive damage award.