The Taxability of Auto Accident Settlements

After a car accident in Nevada, you’ll inevitably need some form of compensation for your losses. The extent of those losses, more commonly known as “damages,” is variable—you might only need a few hundred dollars to cover some basic repairs, or you might deserve a vast quantity of money to compensate you for extensive bills, suffering, or even the wrongful death of a loved one. Regardless, you’ll go through the claims process, and more than likely will reach a settlement (i.e., a mutual agreement for compensation to avoid going to court). Once that happens, however, you’ll have to worry about the aftermath of receiving a lump sum, otherwise known as taxes.

Components of an Auto Accident Settlement

Auto accident settlements don’t come in a single, vague lump sum; the final quantity represented in a settlement is a conglomeration of a variety of damages, all of which can be split into two general categories: special, and general.

Special damages are simple enough to understand. They’re quantifiable, precise losses you suffer in an accident, all of which can be compensated in full by some dollar amount:

• Auto repair or replacement costs
• Medical bills of any kind
• Lost wages or lost profits, even for the future
• Interest on awards, based on how long your case is pending
• Funeral expenses
• Attorney fees

General damages are the haziest, but also the most lucrative portion of an auto accident settlement. These damages include everything that can’t be measured or truly made up for with a monetary sum, but the law does its best to provide compensation nonetheless. General damages include:

• Emotional anguish
• Pain and suffering
• Loss of consortium (companionship)
• Punitive damages

Although they don’t have specific price tags associated with them, general damages still have precedent for compensation. Adjusters and attorneys will apply a per diem or multiplier method when calculating general damages. The per diem method is usually used for temporary suffering. You’ll be assigned a “daily rate” in dollars, multiplied by the number of days you suffered for. The multiplier method is more commonly used. It applies a multiplicative rate to all of your special damages (usually ranging from 1 to 5), depending on the severity and duration of suffering. 

Taxable and Non-Taxable Damages

With the components of an auto accident settlement in mind, we can dissect the IRS’s Settlement Taxibility publication to understand damage taxability, which varies based on the circumstances of your settlement:

• Outright expenses, such as medical bills, repair costs, funeral expenses, fees, etc., are not taxable.
• Physical pain and suffering damages as a result of a personal injury or sickness are not taxable.
• Emotional suffering is usually taxable, but might not be depending on context – consult an attorney.
• Interest earned on awards is taxable. Interest is interest, regardless of source, hence it’s generally taxable
• Lost wages are taxable; as they make up for a loss in wages or profit, they function exactly as the original income would have.
• Punitive damages are not a reward for you. They are punishment for the guilty, so you’re taxed for them.

Securing Nevada Auto Accident Settlements

Damages and the taxability of a settlement are only relevant if you can actually secure compensation in the first place. Our Las Vegas accident lawyers can help in that respect, simplifying a complex claims process on your behalf to secure you the settlement you deserve. Give us a call today at (702) 550-1111 to schedule your free consultation with a compassionate, local attorney.