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Q: With tax season approaching, should I expect to pay taxes on my auto accident settlement?

As April 15 nears and you are receiving your tax forms, you may be wondering if your judgment or settlement from your auto accident case could mean you will be forking over more money to Uncle Sam than usual. While no two settlements are exactly alike, your taxes are not likely to be affected.

Compensation for Property Damage and Medical Expenses

In these cases, you are being compensated for the loss or damage of something that you already had, or simply being reimbursed for expenses that you already paid. Neither would require that taxes be paid, and since a huge majority of cases fall into this category, most accident victims will not be taxed on any amount of compensation or settlement money directed to property damage, injury, or pain and suffering.

A More Serious Accident That Kept You Out of Work for a Period of Time May Be a Different Story

Lost-wage compensation is meant to replace the income that you would have earned had you not been injured. Since your standard income is taxed, it stands to reason that compensation for income would be taxed, as well.

Most auto accident injury cases do not involve punitive damages, but occasionally these damages are still awarded to the victim as a means of punishing the defendant and discouraging future similar behavior. These awards are almost always taxed, but as it is unlikely that you received punitive damages, you should not have to worry much about it.

As always, with questions like this it is best to consult with your “tax guy” to ensure that you are in the clear, but in general, expect to pay taxes only on the compensation for your lost wages and income.

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