It is always important to consider the tax implications of any financial transaction or any legal settlement. Reaching a settlement in your car accident case is generally a welcomed relief. Cases can be stressful and can drag on for a long time. Once you have finally reached that settlement, you will want to make sure that you are fully aware of all of the tax implications of your settlement. You should always make sure that an experienced car accident settlement attorney reviews the tax status of your specific case, you do not want to be hit with any unpleasant tax surprises down the road.
Medical Expenses and Property Damage
The fundamental goal of compensatory damages is, to the best extent possible, put you back into the position that you would have been had the accident not taken place. The IRS tax code attempts to tax settlement compensation in a way that is consistent with that goal. Meaning, generally speaking, the part of your settlement that compensates you for your medical expenses and your property damage is not subject to taxation. However, sometimes settlements for medical expenses can get a little bit more complicated. Medical expenses can be tax deductible, if you have previously taken a tax deduction for you car accident related medical expenses, that part of the settlement may now be taxable. Like all tax questions, this can quickly become very complicated. A qualified car accident attorney should always review your settlement and answer all your specific tax questions, but ideally your car accident attorney will help you structure a settlement during the process that helps you minimize your tax exposure so that you are not paying an unfair amount of your settlement to the IRS.
Lost wages are meant to compensate you for the money you would have earned at work if not for your car accident injury. Because of that fact, the portion of your settlement that is for lost wages is usually taxable. Your attorney should comprehensively review your case to determine the specific tax implications of lost wages, but you should be prepared to set aside a portion of that part of the settlement for taxes.
Punitive damages are not common in car accident cases. The purpose of punitive damages is to punish the extremely bad behavior of the negligent party, and deter that type of behavior in the future. Punitive damages might be awarded in a case where a drunk driver caused a serious injury to an innocent party. Be aware that punitive damages are almost always taxable. If you receive punitive damages in a car accident settlement or award, be prepared to set aside a portion of that money for the taxes.
Contact An Experienced Car Accident Attorney
Taxes are not fun and they are usually the last thing you want to think about, especially after a potentially lengthy settlement process. But, the tax questions are extremely important. That money is coming directly out of your pocket. Your car accident settlement attorney should get in on the process as soon as possible. Not only will your attorney be able to help you get a full and fair settlement deal, but your attorney will be able to help you reach a deal that best suits your tax situation. If you have been injured in a car accident, please reach out to a Charlotte car accident attorney as soon as possible.