Your auto accident settlement can be your lifeline in a time when your entire world has been turned upside down. You need the money you’re getting to pay for your medical bills, physical therapy, mortgage and utilities while you try to get well again and get your life back.
Many people are rightly concerned that if they take the wrong step, they could end up in dire straits come tax season. In truth, there are some kinds of auto accident awards that are taxable, but not all. Knowing which is which will help you take the proper steps. Learn about the taxability of settlements and judgments for an auto accident, and when a car accident lawyer can be your best bet for compensation.
The lion’s share of awards in a vehicle accident case are compensatory. That means they’re paying you back for something you’ve lost. They’re to help you with your medical bills. They enable you to repair or replace damaged property. They help you to deal with mental trauma, loss of your quality of life, and difficulty keeping things together.
Since these types of awards are basically there to pay you back for things you’ve lost, they’re not new income. The IRS doesn’t tax income that’s not new, or income provided to help you replace lost income. Thus, most of the damages you get from your settlement won’t be taxed.
Lost Wages and Earnings Potential
Your lost wages and earnings potential are a bit of a different story. Since these are designed to provide you with the same kind of income you would normally get from a regular job, they’re treated as normal income. That means that they are taxable at whatever tax rate you fall into based on the award you receive.
Punitive damages are another issue entirely. These damages are neither there to replace your normal wages, nor to pay you back for something you’ve lost. They exist only to punish the defendant in a case. They’re also extraordinarily rare, comparatively speaking. They are only awarded in cases of truly egregious actions which are woefully irresponsible — or deliberate and malicious.
The intent of punitive damages is to hit the guilty party where it hurts while, at the same time, discouraging them from ever doing such a thing again. Because of this, they are treated in much the same way as any other form of non-compensatory income. That is, they are taxable at your normal tax rate.
Chattanooga Car Accident Lawyer
When you suffer an accident, the first thing you should worry about isn’t the taxman; it’s getting compensated for your losses. In order to do that, you’ll need help from an available Chattanooga car accident lawyer. After your attorney helps you get the best settlement possible, you can work on the amount you’ll need to put away for tax purposes. If you find yourself in this situation, contact the attorneys at McMahan Law Firm and receive a free consultation about your case today.