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. Will you have to pay taxes on your car accident settlement in South Carolina?
While West Law Firm encourages talking to our Moncks Corner car accident lawyers to deal with your crash, it is also advised that you consult a qualified accountant to know if your settlement is subject to tax. Here’s what you need to know about which parts of an auto accident settlement may be taxable.
Types of damages in a car accident settlement
You should first understand what types of damages you can get in a settlement from a car accident before considering how they’re taxed. Damages can be classified in several ways.
At the simplest level, damages can be classified into compensatory and punitive damages.
Compensatory damages are funds you receive to compensate you for your losses.
Punitive damages are funds used to punish another party’s gross negligence in causing your accident. Punitive damages are often used to punish reckless, drunk, or aggressive drivers.
While not as common as compensatory damages, they are meant to deter drivers who violate the laws.
Compensatory damages can be classified further into several categories:
- Part of compensatory damages involves payment for medical expenses resulting from the accident.
- A second part involves payment for property damages.
- Lost wages are included among compensatory damages.
- Finally, damages from pain and suffering also fall into the compensatory damages category.
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.
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.
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 as part of your income, and are required to be taxed as such. However, in practice, they often are only taxed as income at the state level. 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.
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.
Will there be taxes on punitive damages?
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 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.
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.
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
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.