When you have a personal injury case, there are some important tax liability questions to consider. With a little bit of planning, you can minimize your tax liability to make the most of your settlement. Our Las Vegas auto accident attorneys are breaking it down for you. Here’s everything you need to know about car accident settlements and taxes.
Taxes on Car Accident Settlements
Some car accident insurance settlements are taxable. However, the portion of the settlement that compensates you for medical bills, pain and suffering and property damages is not taxable. However, if you recover for lost income or emotional distress, the car accident insurance settlement is taxable.
Only some portions of a car accident insurance settlement may be taxable depending on how you label and structure your settlement. This is why it’s crucial to work with a legal professional before you settle your case.
How Do I Reduce Car Accident Settlement Taxes?
You can reduce car accident settlement taxes by structuring your settlement in ways that do not trigger tax liability. For example, if your compensation is for medical bills, it is not taxed. The parties can work to classify the settlement for medical purposes, if possible.
Also, labeling a settlement as compensation for pain and suffering makes it exempt from taxes because pain and suffering are derivative from physical injuries. Even if you have some tax liability, you can reduce it by structuring payments over several years so that your total taxable income is not high in any one year.
What Are the Taxes on Lawsuit Settlements?
The taxes on lawsuit settlements are based on the purpose of the settlement. Some kinds of settlement payments are taxed while other types of compensation are not.
When compensation is subject to tax, it is taxed at the standard income tax brackets. If you receive a large lump sum settlement, you might pay a higher tax rate that you’re used to, based on your typical household income. The taxes on lawsuit settlements are the same income tax rates used in other cases except for portions of the settlement that are exempt from tax.
Car Accident Insurance Settlements That Are Not Taxed
Here are the kinds of car accident insurance settlements that are not taxed:
Emergency medical bills
Surgeries and diagnostic procedures
Pain and suffering compensation
Car Accident Insurance Settlements That Are Taxed
Here are the kinds of car accident insurance settlements that are taxed:
- Lost wages
- Lost long-term income
- Punitive damages
- Emotional distress
Are Punitive Damages Subject to Income Tax?
Yes, punitive damages are subject to income tax. IRS Publication 4345 states that punitive damages are subject to income tax and must be reported as income. You should report punitive damages as “other income” under U.S. federal tax law. They must be reported on a 1040 tax form, and the recipient must pay taxes as though the payments are income.
Are Property Damage Settlements Taxable?
No, property damage settlements are not taxable. If you receive a payment for property damage, you do not have to pay taxes on the settlement amount. That’s because you’re being paid for the reduced value of the property. If you were to be taxed on that amount, you would no longer be made whole for the entire loss due to the accident. Tax laws recognize that it’s only fair not to tax a victim for a property damage settlement.
Structuring Your Car Accident Settlements
Taxes on car accident settlements vary. It’s essential to be aware of tax liabilities long before you reach a settlement in your car accident case. That’s because the structure of compensation plays a significant role in tax liability.
There are several details to be aware of when it comes to tax consequences for a personal injury settlement. For example, in general, compensation for medical bills is not taxed. However, that’s not necessarily the end of the story. If you claim an itemized deduction for medical bills on your taxes, you cannot receive both the benefit of the tax deduction and compensation for your bills. Consulting with an experienced personal injury attorney will help you navigate this often complex settlement process.
How Can an Attorney Help With Car Accident Settlement Taxes
Working with an attorney before you settle your car accident claim can help you avoid costly taxes. For example, say you’re paid $100,000 in compensation for lost wages and lost future income. If you accept the payment all at once, your highest tax bracket, as a single filer, is 24% That means on a portion of the income, you’ll be paying income tax at a rate of 24%!
However, say you decide to structure the payments over a period of five years. You receive payments of $20,000 each year for five years. In that case, your highest tax bracket is 12%. By waiting a period of time for your payments, you can save yourself 12% tax on a portion of your settlement.
Nevada Attorneys to Minimize Taxes on Car Accident Settlements
When you work with an experienced attorney, you have an expert to help you with all of the details. An attorney not only helps you get the highest dollar amount, but they also assist you with structuring the settlement so that the most compensation stays in your pocket. They will also work with you on collecting your car accident settlement. You can have the peace of mind of knowing that you’ve managed your car accident settlement in the best possible way when working with a Nevada attorney.
Attorneys for Insurance Settlement Taxes
Is a car insurance settlement taxable? If you’re wondering how taxes may impact your car accident insurance settlement, you’re already on the right track. Let’s work together to minimize your tax liability. The sooner we’re involved in your case, the sooner we can go to work doing everything we can to maximize your compensation. That includes minimizing or eliminating any potential tax liability. Call us today for your free and confidential consultation with an experienced Las Vegas car accident lawyer.