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When you’re in a car accident, your entire world can turn upside down. You need the settlement you get in order to keep your head above water, to cover your treatments and rehabilitation. The problem arises on tax day when you have to worry about whether you’ll need to pay the piper for the money that you’re desperately dependent on to survive.

The answer to whether you’ll have to pay these taxes is probably — on some of it, but not on all. That’s where it gets tricky. Learn about whether or not you’ll need to pay taxes on your vehicle accident settlement, how it all breaks down, and how a car accident attorney can help.

Types of Damages

There are a few types of damages that you can recover from car accidents. Most of the time these are broken down into two types. The first are special damages, which are measurable and objective — your medical bills and lost wages, for example, have set measurable costs. The second are general damages, which are more subjective and include your pain and suffering and emotional trauma, for example.

However, in terms of taxation, damages are broken down differently. In this case, we’re looking at the reason for the damages.

Medical Expenses and Property Damage

The money you receive for medical expenses, property damage and specific losses exists to repay you for money that you’ve already spent or stand to lose on expenses. Your medical expenses, for example, have costs and those are coming out of your pocket. Repairing and replacing your car comes out of your pocket. The compensation you receive for this, as a result, is not taxable because it’s not income.

General Damages

Pain and suffering, emotional trauma, loss of consortium and damage to your quality of life can be very hard to quantify, but, in the end, the question of taxation comes down to one thing. These damages are also in place to compensate you for financial damage that you suffer. As such, even these kinds of damages are generally not taxable.

Lost Wages and Punitive Damages

On the other hand, awards you get for your lost wages are replacing income that would normally be taxed. Because of that, these awards are likewise taxed based on whatever tax bracket they put you in.

Punitive damages are exceedingly rare and they exist not to cover you, but to punish the defendant and dissuade them from ever doing such a thing again. Because this is “bonus” money, it is considered as “other income” and will, therefore, be taxed at your normal tax rate.

Car Accident Attorney

The first thing you should think about when you get hurt in an accident like this isn’t whether you’ll get taxed, it should be getting your award in the first place. To do this, you’ll need help from an experienced and dedicated car accident attorney who will help defend your rights and get you the best chance at compensation. If you’re in North Carolina and you’ve been hurt in a vehicle accident, contact Lewis & Keller for a free consultation today!

Winston-Salem Office

285 Executive Park Boulevard
Winston-Salem, North Carolina 27103

Phone: 336-765-7777
Fax: 336-659-1750

Greensboro Office

204 Muirs Chapel Road Suite 100,
Greensboro, North Carolina 27410

Phone: 336-851-1000
Fax: 336-659-1750

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