Are Car Accident Settlements Taxed in New Jersey?

Being injured in a car accident may result in a large settlement for your injuries and damages. However, when you receive your money, is the government going to want part of your personal injury settlement? Are you going to be required to include the proceeds from your car accident settlement as income when you file your tax return? In most cases, you should not owe taxes on personal injury claims for physical injuries. However, there are exceptions to this rule. Consulting with an experienced New Jersey car accident attorney before you accept a settlement for your claim may help you avoid a large tax bill for your car accident settlement.

Physical Injuries vs. Emotional Injuries

The Internal Revenue Service (IRS) taxes car accident settlements for emotional injuries differently from settlements for physical injuries. Typically, compensatory damages related to a car accident are not taxable IF the compensation is related to physical injuries. Compensation designated for emotional injuries, such as depression and PTSD, is generally considered taxable under the IRS guidelines.

The IRS is very specific about what qualifies as a physical injury. Symptoms of emotional distress are not considered “physical” injuries. For example, if you suffer migraines because of a head injury sustained in a car accident, the migraines may be considered a physical injury because a blow to the head caused the migraines. However, if the migraines are the result of emotional distress, the compensation may be taxable. Even though you suffer a “physical” condition, the IRS may consider the migraines a symptom of the emotional distress and tax that portion of your car accident settlement.

Itemizing Medical Expenses on Your Tax Returns

Another exception to the general non-taxable rule for car accident settlements is in the case of itemized deductions for medical expenses. If you claimed the medical expenses related to the car accident on your tax return as a deduction, the portion of your settlement related to those medical expenses could be taxed.

Punitive Damages are Always Taxable

Compensation designated for punitive damages will always be considered as taxable income, regardless of the type of injury you sustained. Punitive damages are rarely paid in car accident claims. The damages are intended to “punish” the other party for wrongdoing that is especially harmful and committed with a wanton, reckless disregard for the safety of others or gross negligence.

Settlements vs. Court Verdicts

When determining whether a car accident settlement is taxable, it does not matter whether you settled your case or you filed a lawsuit. Car accident settlements and verdicts by a judge or jury are treated the same for tax purposes. You must examine the type of compensation being received and the injury sustained to determine whether the compensation is taxable.

Contact a New Jersey Automobile Accident Attorney Before Accepting a Settlement

Determining whether a car accident settlement is taxable can be complicated. In some cases, it may come down to the wording of the settlement agreement with the insurance company. Before you accept a settlement for a car accident claim, it can be beneficial to have a New Jersey automobile accident attorney review the claim. Schedule a consultation with our New Jersey automobile accident lawyers as soon as possible. Our attorneys can advise you regarding taxable compensation and verify whether you are receiving a fair settlement for your car accident claim.