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Posted in Car Accidents on May 1, 2016   |  by Gary Burger

Is Your Car Accident Settlement Subject to Taxes?

Auto accidents are a fairly frequent occurrence. In 2012 alone, approximately 2.09 million Americans were injured in car crashes and 21,667 were killed. Approximately 500 adults ages 65 and up are injured every day in car crashes. Though adult seat belt use is a great way to reduce injuries and save lives, accidents still happen, and so do lawsuits.

But let's skip the accident, and say you've already gone to an auto accident attorney and settled your personal injury claim. Now you're likely facing a new uncertainty: will you have to pay taxes on the money you receive as compensation?

This question is one of the reasons that the best personal injury lawyers you can retain are auto accident attorneys that specialize in cases like yours. Usually auto accident attorneys are acquainted with the complex regulations involving settlements and taxation and can explain how taxes will apply to your specific case. Failing that, you can also ask your tax adviser.

In most cases, the money you receive in a settlement won't be taxed, but there are notable exceptions based on what kind of settlement you receive and under what circumstances.

Settlements and judgments are generally viewed under the same tax laws, so it doesn't matter if you receive your money through one or the other. You can find information related to taxability of settlements and judgments in Internal Revenue Service Regulation 26 C.F.R 1.

In a case where you receive general and compensatory damages, you usually won't have to pay taxes, because the amount is meant to reimburse you for what you spent out of pocket. You also won't be taxed if you receive compensation for vehicle damage.

If you're compensated for lost income, that amount will generally be subject to income tax, since your original income would have been taxable if you hadn't suffered income loss. Even if income loss is a small part of a larger settlement, you usually have to pay income tax.

Punitive damages from a defendant who exhibited especially dangerous or egregious behavior are almost always subject to taxes.

Remember, personal injury attorneys can give you an idea of what to expect, but to get definitive information about your taxes, you'll have to visit a tax adviser