The journey to getting an accident settlement or a trial verdict is long and hard. The journey includes a long and exhausting process to fight for your compensation. Even though the accident resulted in your injury and pain. However, after winning the fight that you may find that Uncle Sam expects tax from your settlement or compensation award.
After getting your compensation you are able to pay your medical bills and plan on paying future bills to come. However, you may not know that you are expected to pay taxes on the settlement money that you have received. Paying tax depends on the facts and circumstances of your case.
Medical damages from car accidents are not taxable for the most part. These types of damages are not taxed as they are seen as a refund for your out-of-pocket losses. However, this changes if you took a medical itemized deductions related to the injury in prior years. The IRS states, “You must include in income that portion of the settlement that is for medical expenses you deducted in any prior year(s) to the extent the deduction(s) provided a tax benefit.”
Tax and Emotional Distress
People compensated for emotional distress may include compensation for depression, anxiety or post-traumatic stress disorder (PTSD). Generally, the IRS divides this type of pain and suffering into two categories:
- Emotional distress “originating from a personal physical injury or physical illness”. This is treated in the same manner as the medical damages. As a result you will not pay taxes on such emotional damages because they stem from a physical injury.
- Proceeds from emotional distress that do not come from a personal injury or physical illness are taxed. For example, if a car accident victim developed a phobia of driving after the accident. But the phobia is not because of an injury such emotional distress damages must be taxed.
Lost wages are taxed; they are viewed as being like the wages you would have earned which are taxed. The same is true where a person has lost profits from their trade or business due to their injuries.