It’s tax season and if you were injured in a car accident and received a settlement you may be wondering whether or not the IRS will require you to pay taxes on it.
Below is a quick rundown of what compensation types are typically not taxable, may be taxable, or not taxable. However, we always recommend you talk to and rely on your tax professional for all tax advice.
Not Taxable
Medical Benefits
Medical Benefits are not taxable. These benefits cover an injured person’s medical bills after an auto-accident.
Disability to Guardian
Disability payments made to a guardian on behalf of an injured person are not taxable. Not regarded as income, these benefits are not subject to taxation.
May Be Taxable
Pain and Suffering
Pain and Suffering damages, which are meant to compensate an injured victim for their mental and physical anguish, are not typically taxed. However, if your settlement is confidential this can change.
Lost Wages
Compensation for Lost Wages is not taxable so long as they stay within certain limits. Compensation being paid beyond the three year mark or exceeding Michigan’s monthly maximum rate may be eligible for tax.
Taxable
Replacement Services
Replacement Services payments are provided to cover the cost of outsourcing household chores normally completed by the injured victim. This compensation is treated as taxable income whether the chores are done by a company or family member.
Attendant Care
Attendant Care benefits cover the cost of having a professional provider or family member provide routine care to a person injured in an accident. Since these benefits function as income, they are taxable.
