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Do I Pay Tax on My Car Accident Settlement in Indiana?

When you are injured in a car accident, you suffer a variety of economic and non-economic damages.  Under Indiana’s personal injury laws, you are entitled to recover compensation from another party if that party was negligent in causing your injury. For instance, if another driver fails to yield the right of way, rear-ends your vehicle, or causes a head-on collision, you can file a claim against that other driver for the damages you sustain because of the car crash.

In many cases, you are entitled to receive compensation for your:

  • Property Damage
  • Medical Expenses
  • Lost Income
  • Permanent Disability
  • Out-of-pocket Expenses Related to the Accident, Your Injury, or Your Recovery
  • Emotional and Mental Suffering
  • Physical Pain

 Most of the compensation for a car accident settlement is non-taxable. However, there are some exceptions.

Compensation for Medical Expenses

The compensation for your medical expenses is non-taxable if you did not claim the medical bills on your tax returns and the expenses are directly related to injuries sustained in the accident. If you claimed the medical expenses on your tax return and received a benefit from the deduction, all or a portion of your compensation for these expenses may be considered taxable by the Internal Revenue Service.

Compensation for Lost Income and Wages

Because your wages and income would have been taxable had the accident never occurred, the portion of your settlement related to loss of income is taxable.

Compensation for Pain and Suffering

Your “pain and suffering” damages are intended to compensate you for your physical pain, stress, mental anguish, and emotional distress that the accident caused. The Internal Revenue Service does not usually tax pain and suffering damages that are directly related to a physical injury, disability, or illness that is directly caused by a car accident.

Other Out-of-Pocket Expenses

Other economic losses may or may not be taxable.  Like lost wages, if you claim these expenses on your tax return, you may be required to pay income taxes on the portion of the settlement that compensates you for these losses. However, determining whether economic losses other than lost wages are taxable can be complicated. An experienced car accident lawyer should be consulted.

Punitive Damages

Punitive damages are not applicable in all cases. These damages are intended to “punish” a person or party for gross negligence or actions that are willful and wanton with a disregard for the safety of others. Punitive damages are taxable as income by the Internal Revenue Service in personal injury case.

Get Help with Your Car Accident Claim?

How your settlement agreement is worded can impact whether you pay taxes on your car accident proceeds. It is important to consult an experienced car accident lawyer before you agree to a settlement or sign any releases or documents for the insurance company. If your settlement is not structured correctly, you may be required to pay a substantial amount in personal income taxes.

For help with your car accident settlement, call The Ken Nunn Law Office to speak with a car accident lawyer. Contact our office by calling 1-800-CALL-KEN or 1-800-225-5536 to schedule a free consultation. You may obtain additional information or request a free appointment with a car accident lawyer by using the Live Chat feature on our website.

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