There is nothing good about getting in a car accident, especially if it left you injured and unable to work. If you are currently in the process of settling your car accident case and are expecting to receive a large settlement, you should talk to your lawyer about how this could affect your taxes. The settlement you receive will probably be to cover the injuries you experienced and damages to your car, but you may also receive compensation for loss of income, emotional stress, and other types of things like that. Before you receive your settlement, it's important to understand whether it will be taxable or not, and here are several things you should know.
Most of Your Settlement Will Not Be Taxable
The first thing to understand about taxes on a personal injury settlement is that they primarily are not taxable; however, it depends on what the money is allocated for. The main type of compensation people receive through car accident settlements is designed to cover the injuries they incurred and the damages to their vehicles. If the entire amount you are receiving is to compensate you for these things, you will not have to pay any taxes on the check you receive.
If you receive money for pain and suffering, this too is also tax-free. Pain and suffering is considered part of the normal healing process after injuries occur, so it will not be money that you have to pay taxes on if you receive it as part of your settlement.
There Are Parts of the Settlement That Might Be Taxable
You should also understand that some of the money you receive might be taxable, and there are two main categories of compensation that are taxable:
- Loss of income – A lot of people fight for compensation to cover the money they have lost and will lose by not being able to work. If you are receiving money for this, you will have to pay taxes on it, and this is simply because income is taxable. If you could work and could earn money, you would pay taxes on it. Therefore, if you receive money for loss of income, this money will be taxable.
- Emotional distress – Emotional distress is not the same thing as pain and suffering, and it is money you must pay taxes on if you receive any compensation for it.
Other than these things, there should not be any other forms of compensation that you will have to pay taxes on.
Your Lawyer Can Help You Find Ways to Reduce Tax Liability
If you want to avoid paying taxes on the money you receive, talk to a lawyer like James Lee Katz. He or she can probably recommend some different options that may help reduce the amount of taxes you will have to pay after you receive the settlement.
One way to do this is for your lawyer to fight for compensation for pain and suffering instead of emotional distress. These two things are very closely related, yet one is taxable and the other is not. If your lawyer can receive compensation for pain and suffering instead of emotional distress, you can avoid paying taxes.
Another option is to choose a structured settlement for your money. This is something that pays you your settlement amount over a period of time, and it can help you save money on taxes by distributing the total amount over many years.
If you are involved in a car accident case and would like to find out more information about your settlement and the potential taxes you may have, talk to a car accident injury lawyer today.