If another driver leaves you injured in a car accident, you have been through a challenging experience. Once you receive a settlement, you can continue on the path toward physical, financial, and emotional recovery. One thing you may not have taken into consideration, however, is whether your settlement is a taxable event. Fortunately, most such settlements are not, but this is not a universal truth, and it illustrates yet another fine example of why you should turn to an experienced Central Texas personal injury attorney in the event of a car accident.
Your Car Accident Settlement
When you are awarded a settlement following a car accident that is caused by someone else’s negligence, the idea is to provide you with adequate funds to attend to the damages you have suffered. If you end up paying a percentage of your final settlement amount to the IRS, it obviously leaves you with less money to attend to your losses.
What Portion of your Settlement Is Taxable?
While the settlement amount that is intended to cover your physical injuries should not be taxable as long as you have not itemized tax deductions for related expenses in a previous federal tax year, other settlement amounts may be taxable:
Reimbursement for wages lost – either real or expected over the course of your career – are taxable. This reflects the fact that wages are taxable in every circumstance, including when they are part of a settlement award.
Interest earned on your settlement may be taxable in the same way that interest earned on an investment is taxable.
The portion of your settlement that covers your emotional suffering and/or any punitive amount directed toward the negligent motorist who injured you may be taxable.
Reducing Your Settlement Tax Burden
When it comes to reducing the tax burden associated with your car-accident settlement, appropriately structuring the settlement can help minimize what you pay out in taxes. It is also important to ensure that the damages delineated in your claim are categorized correctly. If you have sustained significant damages in a car accident that was caused by another motorist’s negligence, it is in your best interest to work closely with an experienced Central Texas personal injury attorney who is knowledgeable about managing the attendant tax burden.