Tap To Call

Are Car Accident Settlements Taxable?

paperwork from Houston car crash attorney

Talk to your Houston car crash attorney about what happens with your settlement money.

After a car accident, you work with your Houston car crash attorney to get the compensation you need to recover. This process involves building a case, negotiating with insurance adjusters, and sometimes fighting in court. However, it’s also important to know what to expect after you receive your money. For instance, many people wonder whether a car accident settlement is taxable. Of course, you should talk to your tax professional about the particulars for your situation. However, we’ll explore some general information that may help you in this article.

Talk to Your Houston Car Crash Attorney About the Value for Your Claim Before Accepting a Settlement

Car accident claims can provide a large sum of money as compensation, depending on your case. For instance, if you were severely injured, you may need a high settlement amount. This can help you cover your medical costs and other accident-related expenses. Knowing the value of your claim not only helps you negotiate and accept fair amounts for your case. It can also help you get a sense of how it might affect your taxes and what may be taxable or not. Knowing the value of your case can help you plan and prepare for everything from sending a demand letter to discussing what will happen next year with your tax professional. 

How Settlements Work for Car Accident Cases

Before we get into the nitty gritty about car accident settlements and taxes, it helps to have some background knowledge on how a settlement works for a car accident case. Most cases settle outside of court, so we’ll mainly discuss this situation in this article. 

Once your Houston car crash attorney negotiates with the insurance adjuster assigned to your claim, you may reach a fair settlement amount for your case. If you decide to accept this, then there are a few things that happen.

First, you typically need to sign a release form. This is essentially an agreement that you will not seek more compensation  from the insurance company or the at-fault driver after taking the agreed upon settlement amount. Once you sign this document, you can’t file any further claims or take the other driver to court for more money, even if you experience future medical expenses from your car accident injuries. That’s why your attorney typically recommends waiting until you’re fully recovered or until you have reached maximum medical improvement before accepting a settlement. Just as a refresher, maximum medical improvement is where your doctor doesn’t expect you to improve with further time or treatment. 

After the insurance company receives the signed release form, then they typically cut a check within a few business days. This check is usually for the total settlement amount and they typically send it to your Houston accident injury attorney to distribute. In Texas, your attorney must have a separate trust account that they deposit the check into. Things are paid out of this account. It helps you settle all your accident-related expenses, pay your attorney a fee for their assistance, and then whatever balance remains goes to you. 

Discuss How Your Houston Car Crash Attorney will Distribute Funds from Your Settlement

Before accepting a settlement amount, you and your Houston car crash attorney will make sure you understand how it will be distributed. Typically your lawyer needs to satisfy any medical liens before cutting you a check for the difference. This is generally only if you worked with your doctor to delay paying bills until after your settlement. If you paid your medical bills, then the settlement amount for those costs will go to you as reimbursement. 

It’s also important to note that if you used health insurance for some of your accident-related medical costs, then you may need to pay the insurance company back what they paid on your behalf out of your settlement amount. This process is called subrogation. Keep in mind it can take a little time to negotiate and finalize with your medical insurance company. 

Also, if your Houston car crash attorney works on a contingency basis (like the lawyers at DeSimone do), then some of your settlement will also go to pay them for their services. This is typically a percentage of your settlement that you and your lawyer agree to before they take on your case. 

Anything left over after paying these various expenses then goes to you. 

Are Car Accident Settlements Taxable?

So, do you pay taxes on a car accident settlement? This is a common question that we hear from car accident victims. According to the IRS, typically settlements from personal injuries are not taxable income. However, there are several exceptions that it’s important to know. Some parts of your settlement may be taxable and some may not be. 

Your Houston Car Crash Attorney Itemizes Damages for Your Case

At the beginning of your case, your Houston car crash attorney itemizes all the damages you face from your accident. This includes things like medical costs, lost wages, property damages, as well as non-economic damages like pain and suffering. There should be a breakdown of how you got to the amount in your demand letter to the insurance company. This breakdown will help you understand what is and isn’t taxable according to the IRS. So, have this at-hand to determine what you do and don’t need to claim as income on your taxes.

Some Damages are Taxable and Some Are Not

Parts of your settlement may be taxable as income for your car accident case. Once again, check with your tax pro for specifics based on your personal circumstances. 

Tax Exempt Parts of a Car Accident Settlement

In most cases, money you receive for medical damages, property damages, and pain and suffering connected to a physical injury are tax exempt. So, let’s say you received $5,000 for medical expenses from a back injury. You also receive $4,000 to pay for the costs to repair your car. Finally, you receive $10,000 for your pain and suffering because the back injury causes chronic pain and also prevents you from picking up your children, which causes you significant mental anguish. In most cases, none of this is taxable. 

Taxable Parts of a Car Crash Settlement

However, there are some taxable car accident damages you may receive. For instance, if you receive money for lost wages, you typically need to claim that amount of the settlement as income. Also, if you claimed your medical expenses and received a tax benefit previously for them, then you will also need to claim the settlement portion you received for your medical costs. 

If you received damages for mental anguish or pain and suffering that are not connected to a physical injury, then you also need to claim this money as income. For instance, if you walked away without a scratch, but developed severe anxiety around driving. If you received compensation for this condition, then the IRS considers this income. However, you can typically deduct anything you paid in medical care for this, such as psychiatrist visits. 

Finally, punitive damages are typically taxable as well. Punitive damages are pretty rare for your average car accident case. Typically you only receive them in cases where the other driver acted grossly negligent. For instance, driving drunk or intentionally causing an accident. 

DeSimone Law Office – Houston Accident Injury Attorney

If you were injured in a car accident, contact our Houston auto personal injury team at DeSimone Law Office. We offer experienced legal services for victims of car accidents. We have helped settle thousands of cases for car accident victims. Get in touch now for a free case evaluation with one of our lawyers. 

This entry was posted in Car Accidents, Houston Auto Accident Attorney, Traffic Accidents. Bookmark the permalink.
  • Facebook
  • Twitter
  • Googleplus
  • Linkedin
  • Linkedin
  • Blog