If you are injured in a motor vehicle collision, or any other type of personal injury accident, you may be entitled to compensation for those injuries if another party’s negligence caused, or contributed to, the accident. Unless you have been through a personal injury lawsuit before you will likely have a number of important questions concerning the litigation and settlement process, such as “Is compensation from a personal injury accident taxable?” Because there are several different types of compensation you might receive as the victim of a personal injury accident, that question cannot be answered with a simple “yes” or “no.” Instead, the answer depends on the type of compensation and/or the purpose of the compensation.
As the victim of a personal injury accident the settlement or award you receive will likely represent compensation for a number of different things. To determine if you will owe taxes on the compensation you must first break down the settlement/award into categories and then analyze whether or not that category of compensation is taxable. The following are the most common categories or types of compensation you may receive as the victim of a personal injury accident:
- Property damage – if you were injured in a car accident, for example, you might be reimbursed for costs associated with repairing your vehicle, or for the value of the vehicle if it was totaled. In almost all cases this compensation is not taxable.
- Medical bills – costs associated with a hospital visit, treating physicians, or other medical expenses are not taxable.
- Lost wages – this category is usually simple because it is almost always taxed, just as the income would have been taxed had you actually been paid by your employer instead of the at-fault party.
- Pain and suffering based on physical injuries – this is where an award or settlement can get tricky. Compensation non-economic damages (pain and suffering) that is based on physical injuries suffered by the victim is not taxed.
- Emotional distress – that portion of a non-economic damages settlement/award that is intended to compensate a victim for emotional distress, and is therefore not based on a physical injury, is taxable.
- Punitive damages – whereas compensatory damages are intended to compensate a victim for actual damages suffered, punitive damages are intended to punish the defendant for wrongdoing. For this reason, most states only allow punitive damage awards if the defendant’s conduct was extremely egregious. If punitive damages are awarded, however, they are taxable.
As you can see, the way in which compensation in a settlement agreement is structured can have a dramatic impact on the amount of the settlement funds a victim ultimately gets to keep. This is yet another reason why working with an experienced personal injury attorney is so important. If you have additional questions or concerns, contact the attorneys at Broussard & Hart, LLC by calling 337-439-2450. We’re available 24/7.