Are Auto Accident Insurance Settlements Taxable?

Recover the Damages You Deserve

Following an accident, you should never settle for less than you deserve. Pursuing damages can help you and your family avoid financial distress and move forward with your life. But how are car accident settlements taxed? This question is an important one and one which many car accident victims have. Read on to learn more about your options.

Are Settlements from Car Accidents Taxed in Colorado?

Generally, settlements received following a car accident will not be taxed through Colorado or the federal government. The reason is that any settlement you receive following an accident is intended to help you recover from the accident and its financial downfalls and bring you whole.

If the settlement was considered income, the amount may be taxed, but as it is strictly meant to bring the victims back to whole, financially speaking, the amounts received that are directly related to the damages from a car accident are safe from being taxed.

Physical Injury Settlements

According to the Internal Revenue Service, “if you received a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable.”

If you have deducted for medical expenses in prior years or for over a year, you must include the settlement as income, which may be on a pro-rata basis if it was over multiple years.

Deductions are common, as some cases can take multiple years to complete, meaning that during the completion of the personal injury trial, you may need to make deductions for medical costs to incorporate those deductions into the taxes upon completion of the trial and receiving the settlement.

What Are Punitive Damages?

Punitive damages are an option in Colorado following a car accident and are not awarded in every case. Punitive damages are reserved for those cases where the offender acted in a particularly careless, negligent, or intentional way that directly led to the accident. For example, punitive damages may not be awarded in a standard collision. Still, they may be granted if one of the drivers was severely intoxicated or driving while distracted, which leads to devastating results for those involved. Courts may find that the driver was grossly careless or negligent, and therefore, punitive damages are to punish the defendant further and deter others from acting in the same ways.

As these damages are meant to punish the offender and cause hesitation in others who may act in the same way rather than to make you financially whole as economic damages are meant for, these damages may be taxed both by the state of Colorado and on a federal level.

Is Interest From Settlements Taxable?

Another exception to the general rule that settlements are not taxed is if the defendant has set up a payment plan that includes interest to finalize the settlement. This option is also common because some settlements are large, and the defendant will need time to pay off the amount entirely.

Payment plans may result in interest being added, and this interest is generally taxable. For example, if the entire settlement that was awarded to you regarding physical and economic damages were $100,000 with $5,000 of that being interest, the $5,000 of interest would typically be taxable in the years that it was received, as it is in addition to the portion that was to make you financially whole.

Examples of Damages That Aren’t Generally Taxable

Medical expenses – any expenses associated directly with the physical injuries caused by the accident aren’t typically taxable. These damages can include medical bills, prescribed therapy, and other follow-ups that doctors require following an accident to ensure you are physically sound.

Lost wages – it’s easy to miss out on necessary wages following an accident while you are receiving medical care, tending to your medical needs, completing necessary therapy prescribed by your doctor, and more. The damages associated with lost wages aren’t typically considered taxable. However, in some cases, they may be as they are meant to replace the income you missed while tending to injuries.

Future Lost Income – in the cases where the injuries were so severe that you aren’t likely to receive the same income level in the following years, you may seek damages to bridge the gap. These damages are generally not taxed, but as they directly relate to future income, it’s best to consult your attorney to determine what taxable amounts should be reported.

Pain and Suffering – if you are awarded damages based on pain and suffering from your accident, these are generally not eligible for taxation, as they are intended to bring you to whole.

Don’t Pay Unless You Win

Our firm believes strongly in getting the desired results for our clients. We are fierce advocates with a strong sense of compassion and respect for what our clients are experiencing following an accident and how disruptive they can be to your life and financial outlook.

Don’t settle for even a dollar less than you deserve. Contact our office today at (720) 707-0870 to schedule your free consultation and learn more about your options.

We are tireless advocates for our clients, regardless of the size of your case or damages, and we work together as a seamless team along with you to create a winning strategy and help you get back to life as you know it.

Don’t let minor mistakes cost you dearly following an accident. Contact your local award-winning team today to get started.