car accident photo

Getting into a serious car accident can be a life-changing experience. Injuries can cause you to miss work, or even lose your job. In some cases, injured drivers become completely disabled, with little chance of ever again being able to earn an income. 

As a result, a large settlement may be awarded, and in most cases you will not have to pay taxes on your injury-related settlement amount. But when it comes to taxes, it seems there are always some exceptions to the rule. It all comes down to how your car accident settlement is structured.

Do you want to find out more? Watch there: pre settlement loans auto accidents


Taxes on Your Insurance Settlement

In most cases, if your settlement is for personal physical injuries or illness as a direct result of your auto accident, the full amount of your award will not be taxed, as long as you did not take an itemized deduction for medical expenses related to the injury or sickness in prior years. 

Bear in mind that settlement cases can take months or sometimes years to settle. If you had injury-related medical expenses and deducted them prior to your settlement, the medical portion of your settlement may be subject to taxation.

Settlements are often structured in such a way that the victim is compensated for more than one category of damages. Depending on the court’s decision, you may receive compensation for:

  • Medical expenses
  • Long-term medical care
  • Lost wages or profits
  • Pain and suffering
  • Emotional distress
  • Damaged property
  • Damages to punish the guilty party


Part of Your Settlement Proceeds May Be Taxable

Even though your car accident settlement is generally not taxable, some parts of a structured settlement may be taxable. It all depends on what you are being compensated for. 

For example, your settlement may be structured something like this: 

Lost wages           $10,000

Medical bills         $75,000

Pain and suffering   $20,000

Punitive damages   $20,000

Total settlement:    $125,000


In this case, the personal injury portion of your settlement, including medical expenses and pain and suffering are not taxable. However, you may have to pay taxes on compensation for lost wages or profits, since those funds are intended to replace income for which you would normally be taxed. You will also have to pay the usual rate for Social Security and Medicare taxes.

Compensation for emotional distress and punitive damages are also subject to taxation. If your case is tied up in court, you will be paid interest on the settlement amount during the time period it takes to settle your case, but you will have to pay taxes on the interest once the case is settled. In other words, anything that is not directly related to the personal injury portion of your settlement may be taxable. 


Other Things to Consider

It is important to remember that if you hire an attorney or get a settlement cash advance on contingency of winning your case, your lawyer’s fees and cash advance repayment will be deducted from your total settlement amount. Nevertheless, the taxable portion of your settlement will be calculated based on the total amount of your settlement, prior to those deductions. 

To learn more about the settlement process and taxes on your insurance settlement, contact Cronus Capital Group. Our friendly staff of legal professionals will be happy to answer all your questions, and walk you through the settlement process, step-by-step.

Request a Free Consultation