Accident insurance proceeds are taxed depending on the category of income they are generated from. If the accident caused you to incur medical costs or damage to property, the proceeds will be taxable. If you received damages for pain and suffering, punitive damages, or lost wages, these amounts are not taxable. Those amounts can only be claimed for three years. If you incurred any loss of wages as a result of the accident, the money you received from your accident insurance will not be taxable.
However, not all injury-related payments are taxable. For example, property damage settlements are not taxed because the settlement is made for the diminished value of the property. Taxing such payments would significantly reduce the total loss of the injured party. Moreover, the tax laws recognize that these payments are fair and allow for substantial payouts. The amount of tax due on accident insurance proceeds will depend on the state in which the settlement was made.
Even though the compensation is taxable, you can save on taxation by structuring your settlement carefully. For instance, you can opt for a structured settlement, which means the insurance company will pay you a specific sum of money over several years. This way, you won't have to worry about the taxes on the interest income, and the payments can cover years of lost wages. By choosing this type of settlement, you can save as much as 25% or more of the income you received on your accident.
While the taxation rules for insurance settlements are clear, a large percentage of car accident settlements are exempt. If you choose to pursue this type of settlement, you should seek the advice of an income tax advisor. It is also advisable to make sure that you don't receive the full amount of the settlement without itemizing your expenses. The Barnes Firm understands your concerns regarding accident settlements. Our lawyers know how to maximize the benefits you receive from such settlements, while avoiding paying taxes on any portion of them.
A personal injury settlement may also be taxed. If you were injured in an accident, the settlement money will go toward paying medical expenses. Because your damages may include future medical costs, they won't be included as income. If, on the other hand, the settlement money you receive is for the deductible you paid to the other party, that money is taxable. The rest of your settlement, though, may be tax-free if it is for property damage.
When is your accident insurance settlement taxable? It is a good idea to keep medical receipts to support your claim and ensure that your expenses are covered by your policy. Many insurance policies do not cover expenses incurred in the accident. If you need more money for medical care, you may need to pursue litigation against the other party. If you are successful, you'll receive a settlement from the at-fault driver. However, be sure to examine your financial situation before agreeing to any settlement amount.