Do You Have to Pay Taxes on a Car Accident Settlement?
Many people recovering from car accidents worry that their injury settlement might come with a hefty tax bill. After finally securing compensation for their injuries, the last thing anyone wants is for the IRS to take a big cut. Fortunately, most personal injury settlements are not considered taxable income—but there are exceptions you should be aware of.
At Applebaum Accident & Injury Law, we make it a priority to help clients understand not only their rights, but also how their settlement may affect them financially, including during tax season.
Here’s what you need to know about how the IRS treats compensation from car accident claims.
Are Personal Injury Settlements Taxable?
In most cases, no—personal injury settlements are not taxable under federal law. According to IRS Publication 4345, compensation you receive for physical injuries or illness isn’t considered income. That means:
-
If you’re paid for medical bills, pain and suffering, or lost wages due to a physical injury, you likely won’t need to report that money on your taxes.
-
Whether you settle out of court or win a jury verdict, compensatory damages tied to physical harm are generally exempt.
However, certain non-physical damages or other financial awards could be subject to taxation.
What Parts of a Settlement Can Be Taxed?
While most of your settlement is likely tax-free, some components may not be. Let’s break it down:
🔸 Punitive Damages
If your case involves punitive damages—extra money awarded to punish a wrongdoer—those are taxable. The IRS treats them as income, and they must be reported on your tax return. These are typically rare in standard car accident cases.
🔸 Emotional Distress Without Physical Injury
If you’re compensated solely for emotional distress (without a physical injury), that portion of your settlement may be taxed unless it includes documented medical treatment for physical symptoms.
🔸 Lost Income in Non-Injury Cases
If your claim involves lost wages unrelated to physical injury, such as in employment disputes or breach of contract, the IRS will treat it as taxable income, just like a paycheck.
🔸 Medical Expense Reimbursement
If you previously claimed tax deductions for medical expenses related to your accident, and later receive reimbursement through a settlement, the IRS may require you to report that reimbursement as income in the year you receive it.
What About Property Damage Settlements?
Car accidents that only cause property damage, without physical injuries, are common. Reimbursement for repairs or replacement of your vehicle is not taxable, as long as the amount doesn’t exceed your property’s value.
Can the IRS Take My Settlement If I Owe Back Taxes?
If you have a federal tax lien, the IRS can seize part—or all—of your settlement to satisfy your debt. This typically happens once the money is deposited into your personal account. If you’re behind on taxes, speak with a tax professional before accepting a settlement.
Are Attorney’s Fees Tax-Deductible?
In personal injury cases, you generally cannot deduct attorney’s fees from your taxes. Personal injury lawyers work on a contingency fee basis, meaning they only get paid if they win your case. Since the IRS doesn’t count the full settlement as income, you can’t claim the portion paid to your lawyer as a tax deduction.
What If I Invest the Money After Receiving It?
Your settlement isn’t taxable—but what you do with it can be. For example, if you invest your funds and earn a return, that investment income will be taxable, just like any other capital gain or interest.
Unsure About the Tax Impact of Your Settlement?
Your personal injury attorney can explain the general tax rules, but for specific tax advice, it’s best to consult with a CPA or tax professional. We often work alongside financial advisors to ensure our clients aren’t caught off guard come tax season.
Timing Matters: Don’t Miss Your Deadline to File
Beyond taxes, the biggest financial mistake you can make after an accident is waiting too long to file your claim. Every state has a statute of limitations—a strict deadline to pursue compensation. Miss it, and you could lose your right to recover anything.
Have Questions About Your Case? We’re Here to Help.
If you’ve been hurt in a car crash and have questions about your legal options—or how your settlement might impact you financially—don’t wait.
Call Applebaum Accident & Injury Law today(855)-Call-Paul for a
, no-obligation consultation. We’ll explain your rights, fight for the compensation you deserve, and help you avoid costly missteps along the way.
