The financial burden of medical costs and missed pay after a vehicle accident may be daunting. Pursuing compensation from people at fault may result in financial relief through a settlement.
Is that auto accident settlement, however, taxable in Texas?
The quick answer is no. The IRS cannot tax you on any money you get if you have gone to trial and won a verdict or negotiated a settlement.
Continue reading to discover more about these auto accident settlements and how devoted Texas automobile accident lawyers like the ones at McKinney Vos can help you receive all you deserve after your accident.
Is a car accident settlement taxable income?
The answer: Most vehicle accident settlements are tax deductible, but some are not.
The rationale for the individual payments and the settlement arrangement determines whether your vehicle accident settlement is tax deductible.
The IRS is in charge of the criteria for determining whether vehicle accident settlements are taxable.
Here are some key considerations to keep in mind.
Compensation for medical expenditures, as well as pain and suffering, is often tax deductible.
Many vehicle accident settlements include general and compensatory damages, which give cash compensation for injuries, diseases, and medical expenditures caused by the collision. These are exempt from taxation.
However, according to IRS rules, you may only deduct medical expenses that exceed 10% of your adjusted gross income, or 7.5% if you are 65 or older.
If you deducted medical expenditures in a previous tax year, you must pay taxes on the settlement award covering the previous year's medical expenses.
Furthermore, accident-related cash compensation for automobile and vehicle damage is tax deductible. This also applies to rental car fees incurred while your vehicle is out of action.
In addition, compensation for automobile repairs and other vehicle expenditures incurred as a direct consequence of an accident is not taxable.
While medical expenditures, pain and suffering, and car damage costs are not taxed, certain cash settlements are.
It is critical to understand the structure of your accident compensation in order to know what you will need to pay taxes on.
In general, there are four types of taxable automobile accident settlements.
You must pay taxes on awards for:
Because your initial income is taxable, a financial settlement to replace your income is likewise taxable.
Punitive damages are also taxed. These damages are intended to penalize the culprit and are only paid in severe circumstances when the motorist who caused the accident behaved carelessly or without respect for human life.
Furthermore, according to IRS laws, emotional discomfort is often taxed.
While pain and suffering are immediate consequences of an accident, mental anguish often creates long-term problems that are not necessarily directly related to the event's damage.
For example, depression caused by the death of a loved one qualifies as pain and suffering and is not taxed. On the other hand, a fear of driving that develops after an accident qualifies as emotional distress and is taxed.
There are typically two strategies to avoid taxable financial rewards and retain more of your settlement money.
The first option is to convert your monetary reward into a structured settlement. This will allow you to stretch out your remuneration over many years rather than receiving a significant amount that would result in higher taxes.
The second approach is to categorize your financial settlement to include the most significant number of tax-deductible awards while avoiding taxable rewards.
McKinney Vos is an Austin-based law firm with years of experience representing victims of vehicle accidents. We help our clients get the compensation and damages they deserve. We are here to help you.
At McKinney Vos, we aggressively represent our vehicle accident victims.
Our Austin personal injury lawyers can assess your legal issues and work tirelessly to discover solutions that fulfill your needs.
If you have been injured in a motor vehicle accident, you should get legal counsel as soon as possible to pursue the compensation you deserve.
Our Austin vehicle accident attorneys can help determine if your personal injury settlement is taxable. Contact us today to learn more.