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When you get compensation for your injuries in a car accident, there is hope for getting your life on track. However, taxes on the accident settlements are something that victims would be concerned about. Generally, they are not taxed because they are compensation for your losses.
However, a portion of the amount you receive may be taxed depending on how it is structured. Therefore, you must have complete clarity about taxes so that you can calculate the effective amount you received as compensation for the injuries, damages, and suffering sustained in the mishap.
The taxable parts of the accident settlement
When it comes to the parts of accident compensation which are liable to taxes, the following are to be included:
Lost wages reimbursement
Wages are always taxable, whether you earn them through standard means or receive them as a part of a settlement. You will have to pay tax on them at the standard income rate, which makes them easy to calculate.
Like wages, interest is an income, which makes it taxable. Any interest payment you get as a part of the settlement is taxed at a standard rate.
Essentially, punitive damages are granted for punishing the perpetrators of gross negligence. Although rare, punitive damages are not regarded as the repayment for the accident implications. This makes them a form of income, which will be taxed.
The compensation for the emotional turmoil is another taxable part of the settlement. Since this is not tangible damage, you can seek guidance from your lawyer to understand what you can expect to pay in taxes on them.
The non-taxable parts of the accident settlement
While a part of the settlement is taxable, there is another that isn’t. Damages that are paid for any expense that you had to pay out of pocket are not taxed. The same applies to income which was already taxed previously.
Since this sounds complicated, it makes sense to consult seasoned auto accident lawyers to guide you in this context. The payments for your medical bills are exempted. Things such as additional household expenses caused by your injuries, transportation expenses to and from medical facilities, and property damage come under the non-taxable parts.
Being aware of these items is important as it can reduce your tax burden to a significant extent. Moreover, this is something that you would absolutely want to do after the accident because you will probably be struggling with your finances.
After the suffering, stress, and financial hardship you may have suffered, the last thing that you would want at this stage is a big tax bill to clear. Also, you shouldn’t think of evading them because it can only make your problems worse.
Conclusion: Car Accident Settlement
The best thing about letting an experienced and knowledgeable attorney is that they can help you with claiming a fair settlement and also ensuring that it doesn’t take a major tax hit.
They can play an advisory role and assist you with a structured settlement that enables you to manage the tax bill more effectively. Even if you have to pay the taxes on the taxable part, you can clear them over time rather than be burdened all at once.