Are Car Accident Settlements Taxable?

Car accident settlements may be partially taxable. While money received for medical bills is likely not taxable, other parts of the settlement might be. Always consult with a reputable tax attorney or financial advisor if you receive a large sum of money from a car accident settlement. 

When does a car accident go to court?  Not very often–car accident cases are typically settled before ever reaching the courtroom for trial. However, if you’ve been injured in an accident, a Phoenix car accident lawyer from Gage Mathers can help. We’ve helped our clients recover tens of millions of dollars in settlements over the past fifty years. 

Types of Settlements

When someone wins a settlement from a car accident, they’ll often say that they were awarded one large amount, such as $200,000. In reality, this money is several separate amounts added together. 

There are two primary categories of settlement claims, which may also have subcategories:

Compensatory Damages

These damages are awarded for any money lost as a result of the accident. They can come from several sources, such as:

• Value of the vehicle
• Medical bills
• Lost wages
• Future medical bills
• Property damage
• Pain and suffering 
• Emotional distress

Punitive Damages

Punitive damages are awarded to the victim of an accident as punishment to the person or company being sued. For example, if a car accident is the result of a mechanical problem that the car manufacturer knew about but did not tell anyone, they can be penalized.

Punitive damages can also be thought of as a fine handed out by the judge, such as a speeding ticket. The difference is that the victim receives the money–not the state. It is designed as a penalty to the company or person to prevent future misbehavior. 

How Settlements Are Paid

Settlements are paid out as either a lump sum or a structured settlement. ‘Lump sum payments’ refer to when the entire amount is paid to the victim in a single transaction. Structured settlements are paid in smaller amounts over time until the entire amount awarded is paid. 

Structured settlements might be used when a person has become disabled by a car accident and needs long-term care that is costly. The money is received monthly or a few times a year, ensuring the victim has a steady income. 

Sadly, some individuals are awarded large amounts of money and don’t understand how to manage it. When receiving a settlement, you should speak with a financial advisor to help you plan for the future. 

Be sure to make a note regarding what questions to ask your lawyer for a car accident settlement so that you are prepared to discuss whether you’d like a lump sum or a structured settlement.

What Is Taxable?

Tax law is complex and there are exceptions for every situation. It is also constantly changing at both the federal and state levels. 

Certain parts of an accident settlement, such as punitive damages and emotional distress, might be taxable. Large amounts that are taxable may also put you in a higher tax bracket. Understanding the tax implications of large awards requires professional help. 

Don’t Go Alone

Gage Mathers is here to help. We will fight to make sure you receive the most compensation possible after a car accident and can help guide you through the process of determining the tax implications of a settlement. Reach out to us today for your free consultation, and let us take the burden off your shoulders!

About the Author

Joseph D'Aguanno

Guided by the belief that being a highly skilled specialist in a narrow field is better than being ordinary in everything, Joseph “JD” D’Aguanno leads Arizona’s best personal injury law firm in Phoenix, AZ. Having extensive cross-training in pre-litigation negotiations and trial lawyer skills, with decades of experience, JD strives to provide clients with the most valuable legal services a personal injury lawyer can provide. Under his direction, Gage Mathers Law Group is an award-winning personal injury law firm providing aggressive representation to victims of a car accident, medical malpractice, dog bite, motorcycle accident, and other injurious events. Gage Mathers is trusted by thousands of lawyers and clients throughout the country because of their reputation for getting clients the maximum compensation they deserve.

Years of experience: Over 24 years
Bar number: 020421
Location: Phoenix, AZ
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