Going through a car accident is always stressful. The process of trying to recover fair compensation for your injuries adds even more stress on top of everything else. When you finally are able to receive the settlement offer that you deserve, it is normal to want to put the whole thing behind you. You just want to move on with your life – taxes are probably the farthest thing from your mind. Still, they need to be considered. The absolute last thing you want after reaching a favorable settlement is to get a shocking bill from the Internal Revenue Service (IRS). Many car accident settlements carry some form of tax implications. It is imperative that victims are fully prepared for any tax issues that might arise from their settlement. Additionally, settlements must always be appropriately structured to ensure that victims are not hit with an unfair tax burden. If you have been injured in a collision, please contact an experienced South Carolina auto accident attorney as soon as possible. Your attorney can help you through the entire claims process and can help you make sure that you are prepared for any issue that you might face, including taxes.
Breaking Down Your Settlement Offer: What Is Taxable?
In order to understand how the tax system works, you must first understand the fundamental goal of compensatory damages. Above all else, the purpose of these kind of damages is to place the victim back into the position that they would have been in had no accident ever occurred. Although certainly, that is not possible in a literal sense. Still, the tax code works in conjunction with this goal. All taxes on injury settlement are applied in a manner that is consistent with the general purposes of compensatory damages. As a result, some forms of compensation are fully taxable, whereas other forms are not subject to any taxation at all. After receiving a major settlement offer, your attorney will need to break down your award into the specific categories of damages. By doing this, your attorney will be able to assess your potential tax liability. The failure to properly declare your settlement could potentially lead to major headaches from the IRS. No one wants to deal with that problem. Every car accident victim must understand how taxes are applied to each of the following four categories of damages.
Your Medical Expenses
As a general rule, compensation that is related to medical expenses will not be taxed. This is true for all forms of medical compensation, including rehabilitation expenses. After all, if you had not been involved in the accident, you would have never had sustained any medical costs. Therefore, making a full and fair recovery requires this type of compensation to be granted free from any tax liability. This issue seems straightforward enough, and much of the time it is, however, it can sometimes become much more complicated. If a victim has already taken a tax deduction for their medical expenses before they received their car accident settlement offer, they may face tax liability. Ultimately, this is a very complicated issue and it is a best practice consult with your car accident attorney before taking any action.
Your Pain and Suffering and Emotional Distress
Dealing with pain and suffering compensation or compensation for emotional distress can be particularly complicated. In South Carolina, any compensation that is directly related to any type of ‘physical injury’ will not incur tax liability. However, in some cases, you may be taxed on compensation that is offered because of your emotional distress. If you sustained any serious pain and suffering or emotional distress as a result of your accident, you need to be represented by a qualified attorney throughout the entirety of the injury claims process. It is notoriously difficult to recover fair compensation for these type of injuries and the absolute last thing you need is to be stuck with an unfair tax bill on top of everything else.
Your Lost Income
In contrast to medical compensation, your recovery for any lost income or lost earning capacity will usually be subject to taxation. This is because lost wages are meant to compensate you for the money you would have been able to earn if not for your injuries. That money would have been taxed had you never been involved in an accident, therefore, your corresponding lost income settlement will also be taxed. It is usually taxed at ordinary income rates. In some cases, you will receive this compensation in the form of a lump sum. It is important to recognize this because it could push you into a higher tax bracket, thereby subjecting you to a higher level of taxation than you would have had to pay if not for your injury. Your attorney can help you seek additional compensation that will account for any extra tax liability that you will sustain due to your lump sum settlement offer.
Your Punitive Damages
Finally, in a limited number of South Carolina auto accident cases, victims may be able to recover punitive damages. These damages, also known as exemplary damages, are not compensatory in nature. This means that they are not based off of the victim’s losses. Instead, their sole purpose is to punish the bad actions of the defendant. While they are relatively rare, they are sometimes awarded in cases involving drunk driving or other extremely reckless behavior. Because these damages are not compensatory, they are always taxed. In the event that you are seeking punitive damages, you need to be ready for the corresponding tax liability.
Were You Injured in a Car Accident?
Our personal injury team is standing by, ready to help. At the David Aylor Law Offices, our dedicated Charleston auto accident lawyers are dedicated to helping victims recover every penny that they deserve. There is no detail too small for our team. If you or a family member has suffered a serious injury in a car accident, please reach out to us today to set up a no-cost, no-obligation review of your case. We represent victims throughout Charleston region, including in North Charleston, Myrtle Beach and Walterboro.