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Are Car Accident Insurance Settlements Taxable?

A serious accident can disrupt your entire life. Through a car accident claim, you can pursue compensation for the full value of your damages, including your non-economic losses and your intangible damages. You may be entitled to receive financial support for vehicle repairs, medical expenses, loss of income, pain and suffering, and more. 

This raises an important question: Is my car accident insurance settlement taxable? The short answer is “usually no.” While there are some narrow exceptions, most compensation in a car accident settlement is paid tax-free to the victim. Here, our Las Vegas car accident attorney provides a brief guide to the taxability of auto accident settlements in Nevada.

The Principle: Car Accident Settlement Largely Not Taxable

To start, it is important to emphasize that a car accident settlement is usually income. As explained by the Internal Revenue Service (IRS), a personal injury settlement—including a car accident injury settlement—is largely not considered to be taxable income. The IRS typically does not tax the compensation received as a result of personal physical injuries or physical sickness.

Key Elements of your Car Accident Injury Settlement that Will Not Be Taxed

After a serious crash, a car accident settlement may include financial compensation for several different types of losses. These damages are not taxable if you suffered a physical injury: 

  • Property Damage: Compensation received for property damage, such as repairs to your vehicle or compensation for the diminished value of your vehicle, is not taxable. Indeed, vehicle repairs are never taxable, even without an injury. 
  • Medical Expenses: Settlements that cover medical expenses from injuries sustained in the accident are also not taxable. You have the right to seek compensation for the full value of your medical care, including ongoing and future medical needs. 
  • Pain and Suffering: Compensation for pain and suffering is not taxed if it is directly related to a physical injury. The injury is key—without a physical injury, pain and suffering compensation would technically be taxable income. 

Lost Wage Compensation May Be Taxed (Technically), But Income Might Be Withheld 

While compensation for physical injuries is not taxable, any part of the settlement that reimburses lost wages is technically taxable. The IRS views this as replacement income that would have been taxed had you earned it working instead of being injured. However, in practice, you do not need to worry about these taxes. Your settlement should include “post-tax” income—meaning it should actually pay you what you would have earned after taxes. 

A Car Accident Settlement Without a Physical Injury May Be Partially Taxable

If you did not suffer a physical injury and any part of a car accident settlement represents compensation for something other than vehicle repairs—such as emotional distress without an accompanying physical injury—the settlement may be taxable. The IRS does not exempt these damages from taxes. To be clear, this is a very rare situation. Insurance companies almost never offer settlement for emotional distress without a physical injury. Further, if you have any physical injury at all, any emotional distress compensation you receive is no longer taxable. 

Punitive Damages are Taxable Under Federal Law

Punitive damages, which are awarded to punish the defendant rather than to compensate the plaintiff for losses, are taxable under federal law. These are considered separate from compensatory damages. Punitive compensation is limited to a very small share of car crash injury cases in Nevada. 

We Help Car Accident Victims Protect the Rights and Interests

Hurt in a motor vehicle wreck in Las Vegas? You need an attorney who stands ready to protect your rights and your interests each and every step of the way. At Ace Law Group, it is our mission to ensure that injured car accident victims receive top-tier, fully personalized legal advocacy. We help clients handle the full range of legal issues—including navigating tax questions about their settlement. You can review our verdicts and settlements and reach out to our Las Vegas auto accident attorney directly with any specific questions or concerns about your legal case. 

Contact Our Las Vegas Car Accident Attorney for a Free Case Review

At Ace Law Group, our Las Vegas car crash attorneys are committed to putting the rights of injured victims first. If you or a loved one was hurt in a crash and you have any questions about the tax implications of a settlement, we are here to help. Give us a call now at 702-213-4998 or contact us online for your free initial case review. From our Las Vegas law office, we take on automobile accident claims across Clark County, including in Henderson, North Las Vegas, and Boulder City.