Do You Have to Pay Taxes on Car Accident Settlements?

If you receive money from a personal injury or car accident settlement, you typically do not have to pay taxes on that money. The Internal Revenue Service (IRS) doesn’t usually put taxes on money you receive for physical injuries, pain and suffering, emotional distress, lost wages, or money intended to fix or replace your car. Money that isn’t for any of those purposes may be subject to tax.

This is why working with a car accident lawyer in Phoenix is important. A lawyer can help you understand the terms of your settlement, including how to protect your assets after a car accident or knowing who pays for your rental car after your accident.

In this post, we’ll dive into everything you need to know about car accident compensation and what money might be taxable.

What Are Car Accident Compensation Damages?

When you win a car accident case, you will usually be paid money to cover a variety of ‘damages,’ or costs, that were a result of the accident. These are also called ‘compensatory damages,’ and they are usually divided into these three categories:

Economic Damages

Economic damages are also often called out-of-pocket losses. This money is supposed to pay you back for losses that come out of your or your health insurer’s pocket. These costs can include lost wages, medical bills, or even replacement household services, depending on the case.

Noneconomic Damages

Noneconomic damages cover any losses or injuries that you might not pay for with money in the traditional sense. Car accidents can lead to pain and suffering, or emotional distress, and those can be difficult to assign a dollar value to.

Punitive Damages

Punitive damages are not designed to compensate you for any type of injury; they are designed to punish the at-fault driver. These damages are usually issued to drivers who caused the accident for being extremely dangerous and reckless while driving. They are are taxable, but are rare in car accident cases.

What About Vehicle Damage Compensation?

If you received money to cover any repairs to your car or pay to replace your totaled vehicle entirely, that payment likely isn’t taxable. It’s important to know what an ‘adjusted basis’ is, though.

An adjusted basis is the amount of money or value that is used to determine the profit (money gained) or loss (money lost) when property (in this case, your car) is sold. If the payout you receive in your settlement is not higher than the adjusted basis for your car, the IRS likely won’t tax it. 

For example, if you bought your vehicle for $12,000 and drove it for a few years, its value likely lowered. Let’s say your car was valued at $10,000 the day it was totaled in a car accident. If the at-fault driver’s insurance company pays you $10,000 or less to replace your car, you likely will not be taxed. However, if they pay you $12,000 when your car is worth only $10,000, you could be taxed on that excess amount.

Answer Your Tax Questions and More

Car accidents can turn your world upside down, and you deserve to be paid for your pain, injuries, and suffering. However, you don’t want to get in trouble with the IRS while you’re trying to piece your life back together.

This is where Gage Mathers comes in. Our team of legal experts can help you understand your car accident case, how much you deserve, and will fight to make sure you are paid. Call our law offices today to see how our team can serve you!

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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