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May 28, 2017 By Andrew J. Cates

Do I Owe Taxes on My Car Accident Settlement?

Do I have to pay taxes on my settlement?Seeking compensation for a personal injury can be an uphill task. However, with the assistance of an experienced and skilled attorney like Hartford car accident lawyer Andrew Cates, you have a greater chance of being awarded a fair settlement. But, how much of that settlement will you be taking home?

Attorneys’ Fees

Most car accident lawyers work on a contingency fee basis. This means that the attorneys’ fee will be deducted from the total amount of the settlement before you receive your share. The amount you receive will be a percentage of the settlement based on your agreement with the lawyer at the commencement of your case. Then the question is whether you have to pay taxes on the amount you receive.

Federal tax laws

The good news is that you won’t be required to pay taxes on your settlement for a personal injury case. Under section 104(a)(2) of the Internal Revenue Code, damages received on account of personal physical injuries or physical sickness on personal injury claims are excluded from gross income. In addition, Connecticut tax law also provides that your settlement is tax-exempt.

What about punitive damages?

If your case goes to trial and your attorney is prove that the conduct of the defendant was particularly egregious, you may be awarded punitive damages. These are awarded as a way of punishing gross negligence or misconduct of the party at fault. Punitive damages go beyond compensation for your medical bills, pain and suffering or lost wages.

In contrast to general damages for your injuries, losses and pain and suffering, punitive damages are taxable and should be reported as “Other Income” on line 21 of Form 1040” according to https://www.irs.gov/pub/irs-pdf/p4345.pdf. State laws may include limits to the amount that can be awarded as punitive damages as well as whether or not they are taxable. In Connecticut, punitive damage awards are rare and tend to be limited. As with federal law, in Connecticut punitive damages are taxable.

Compensation for emotional or mental anguish

The compensation awarded for emotional stress is tax-exempt in many states. These awards are treated just like compensation for physical injuries. The only time when damages for emotional stress will be deemed taxable is when they are not awarded as part of compensation for a physical injury.

Other factors to consider

  1. Interest

If you have earned interest on your settlement, the interest will be considered taxable “interest income”. Settlement amounts may gain interest based on the how long the case has been pending.

  1. Lost wages or profits

If you were compensated for lost wages on the basis of unlawful discrimination or involuntary termination, you may have to pay tax on your settlement. This is because this is not considered a compensation for a personal injury.

Your attorney should be able to advise you as to the taxability of your settlement or award at the time it is distributed to you.

Filed Under: Blog

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