Hurt in a motor vehicle collision in South Carolina? You need justice and compensation, including for the cost of vehicle repairs, medical bills, lost wages, pain and suffering, and other damages. If you have filed a claim for damages after being in a car accident, you are no doubt looking forward to the case being successfully closed. You may have an important question: Will you have to pay taxes on your car accident settlement in South Carolina? The good news is that the answer is that a car accident settlement is usually not taxable income in our state, though there are some limited exceptions.
At The West Law Firm, we encourage talking to our Moncks Corner car accident lawyers to deal with your crash. In many cases, you are also advised to consult a qualified accountant to determine if your settlement is subject to tax. We are experienced advocates for victims and families. We want to make sure that you have the knowledge, tools, and resources to protect your rights and your interests. In this article, you will find a comprehensive guide to the key things to know about taxes and car accident settlements in South Carolina.
The Rule: Know the IRS Regulations On Taxes and Personal Injury Compensation
The Internal Revenue Service (IRS) provides an overview of the law on the taxability of personal injury compensation, including car accident settlements. The key rule is IRC § 104(a)(2). Here is a comprehensive overview of what you need to know about taxability based on types of damages:
What is Not Taxable (Most Damages)
It holds that compensation for personal physical injuries or physical sickness is excluded from gross income and, therefore, not taxable. To be clear, the exclusion applies to personal injury settlements and verdicts. Further, it covers a full range of damages, including medical expenses, and pain and suffering.. However, it only applies if these damages stem from a physical injury or an illness. In a car accident claim, you can avoid tax liability on compensation for your medical expenses, and pain and suffering as long as you can prove you suffered a physical injury.
What is Taxable (Certain Damages)
The damages listed previously—the ones that are not taxable by the IRS—are classified as compensatory damages. They are designed to make you “whole” after a crash. That means that they are linked to specific types of losses that you suffered. There are some other damages that are taxable. More specifically, punitive damages, interest on the award, and compensation for emotional distress (not caused by a physical injury) are typically taxable by the IRS if they are paid out as part of a car accident settlement or a car accident verdict.
A Note On South Carolina Law: As explained by the South Carolina Department of Revenue, our state has a graduated income tax system. However, for the most part, South Carolina follows the IRS regulations for the taxability of personal injury settlements/verdicts, including for car accidents. That means that your car accident settlement is also generally not taxable under South Carolina law.
Recovering the Maximum Compensation: Your Damages Must Be Well-Documented
Before you even begin thinking about tax implications, you need to be sure that you are in the best position to secure the maximum financial compensation after a crash. In South Carolina, victims have the right to pursue compensation for their economic losses and their non-economic damages. However, sadly, insurance companies can make the claims process very difficult for people.
To secure the full value of your personal injury claim, you must present clear and comprehensive documentation of all damages. Among other things, this includes your medical records, diagnostic imaging, physician notes, treatment plans, and receipts for out-of-pocket expenses. Beyond that, your lost wages should be backed by pay stubs, employer letters, and tax returns. Your pain and suffering should be backed not just by medical records, but also by things like a detailed journal or testimony showing how the injury has impacted your daily life.
Why Car Accident Victims in South Carolina Trust The West Law Firm
Hurt in a crash in South Carolina? A proactive approach is key. It is normal to have a lot of questions about your rights and your options after a bad collision. Tax issues are just one of many things that need to be considered and addressed. At The West Law Firm, we are committed to fighting for justice and the maximum compensation for the people and families who need help the most. You do not have to take on an insurance company alone after a bad crash. Our case results tell the story best. Among other things, our Moncks Corner auto accident lawyer is ready to:
- Conduct a free, comprehensive, and confidential review of your case;
- Answer any questions you have about car accident claims.
- Investigate your crash in South Carolina—gathering all relevant evidence.
- Help you document your damages and deal with any tax issues.
- Handle the settlement negotiations with the insurance company; and
- Take aggressive action to help you secure the best possible outcome.
Car Accidents and Taxes: Frequently Asked Questions (FAQs)
What Damages In a Car Accident Settlement Are Taxed?
Different classifications of car accident damages may be taxed, while others are not. In addition, some damages are taxable by the IRS, while others are only taxable in South Carolina. The Internal Revenue Code states in section 104(a)(2) that a taxpayer’s gross income does not include damages received as a result of physical injuries. In addition, South Carolina law states that compensation for physical injury is not taxable. In other words, car accident settlements are generally not taxed.
Is the compensation for property damage in a car accident taxed?
Property damage from a car accident is usually not taxable. However, if you deducted damages as part of a prior tax return, you may be required to pay taxes on those damages. In addition, if any property damages exceed the amount the property is worth, you may be required to pay taxes on that as well. If you have specific questions about the property damage portion of your accident claim, an experienced attorney can help.
Are lost wages taxed in a car accident settlement?
Lost wages and lost profits received from a car accident settlement are considered taxable. Both wages and profits are considered part of your income and are required to be taxed as such. However, in practice, they are often only taxed as income at the state level, or they are not taxed at all. You may only end up getting a settlement that accounts for the “post-tax” wages that you would have earned if you had not been injured in a crash. You should not be taxed if lost wage compensation is designated properly as “post-tax” compensation. It is a complicated issue. You are strongly advised to consult your lawyer, as well as your accountant.
Are pain and suffering damages taxed?
Damages for pain and suffering are not taxable. Your lawyer should be able to advise you on how best to prove your case so that you can not only receive the emotional damages that you are entitled to, but also that you are not exposed to any unnecessary tax liability. The key point to know is that pain and suffering compensation is generally not taxable income as long as it is tied to a physical injury.
Are damages for emotional trauma taxed?
Damages from psychological trauma and PTSD are less commonly awarded and require proof regarding their relation to the accident. Your lawyer can best advise you on how to document these damages, so that a causal link can be established. In the end, they are not taxed as long as you can properly establish that your emotional trauma is linked directly to a physical injury from a crash.
Will there be taxes on punitive damages?
Yes. Finally, punitive damages from a car accident settlement are generally considered to be taxable income, both under federal and state law. Punitive damages are not compensatory and are not dependent on restoring you to where you were financially. You must report this as income on your taxes. Generally, any taxable income reported from settlements on car accidents is reported on the “Other income” line. If you have any specific questions or concerns about the taxability of punitive damages, our South Carolina car accident lawyer can help.
Should I File a Lawsuit for a Car Accident?
Given that you may face taxes on the money received, you may wonder if filing a lawsuit will be worth it. However, if you do not file a lawsuit, you may be unable to recover all the expenses you are entitled to. A lawsuit provides the chance for you and your family to return to a more normal life.
Even if portions of your car accident settlement will go towards your taxes, you shouldn’t let it deter you from pursuing justice from a negligent party. Beyond that, it is important to remember that depending on the type of compensation you receive, most car accident compensation is generally not taxable. Most people do not have to pay any taxes at all on it.
When you talk with your lawyer, you may want to bring up any issues you may have involving taxes on your car accident settlement. They should be able to help clear up some of your concerns regarding your case. More importantly, however, a lawyer can be thorough in identifying all the damages to you and may recover and maximize the amount that you do get to keep in a car accident settlement.
Learn What Your Car Accident Settlement May Be Worth: Set Up a Free Case Review
After a car accident, you may have many questions about what you should do and how you should proceed in recovering from your accident. Let an experienced Moncks Corner auto accident lawyer help you out. West Law Firm has extensive experience in negotiating fair car accident settlements and wielding courtroom experience at trial. Call or contact us today so we can begin pursuing what you may be owed. From our law office in Moncks Corner, we fight aggressively to protect the rights of car accident victims throughout the wider region in South Carolina.