When someone receives a sizeable sum of money because of pay-out on an auto insurance claim the first question they ask is whether or not, they will have to pay taxes on it. This is a good question. In most cases the money given as restitution in an auto claim is not taxable. You may reach a settlement with the insurance company outside of court or in. When and how the claim is processed and the proceedings are followed, does not matter in regards to whether the sum is taxable or not. Personal injury claims are normally the type of accident claim that is taxable. Of course, consulting an accountant is a great option for clarifying any questions you may have regarding taxes on your settlement.
According to the legalities, physical injury or emotional injury caused by a physical one is not considered part of a person’s income and therefore, not taxable. Usually anything received as restitution because of an auto accident is considered nothing more than compensation for any out-of-pocket expenses you had to pay because of the injury. The same thing goes for money received because of property damage. If you receive a lump sum settlement amount towards your totaled automobile, then you will not be taxed for it later on down the road. This means that you can use the money to repair your vehicle, rent a car and pay medical expenses without worrying about setting aside any for taxes. You will receive the full amount owed to you as recompense.
Reasons it may be taxed
There are two exceptions to this rule. The first occurs when you receive an auto benefit for lost wages. Anything that has to do with replacement of wages counts as income and is therefore taxed. The second occurs when you are paid for punitive damages. These types of damages are usually only seen in liability claims where the at-fault person has acted in such a way to warrant punishment and warning. This is rarely seen in auto claims, but it is possible. If you are awarded punitive damages, these will be taxable.
When it comes to the legal system and how different accident claims are handled it really is best for you to speak with your accountant or tax professional. He/she will be able to lead you clearly in what will be expected of you throughout the process and what you can expect at its conclusion. A professional in this field will be able to better detail what type of taxes and how much may be owed regarding your specific claim. This will eliminate the possibility that you pay to little or nothing at all, in-error and will reduce the likelihood that you pay fines because of this. Additionally, a personal injury lawyer that you work with will be able to help you know whether the amount is taxed or not taxed.