Are Car Insurance Settlements Taxable?

Motor vehicle accidents, or commonly known as MVA, is one of the most common phenomena. If you have been involved in MVA, you would certainly have filed a compensation claim. Usually, this compensation is claimed to the car insurance company.

The post-accident injuries and damages determine the settlement of the insurance claim. However, the question is- are car insurance settlements taxable? The answer to this is not so straight forward. This article provides a precise understanding of this complicated matter.

Do You Need to Pay Taxes on your Car Insurance Settlements?

After an MVA, you may be awarded insurance settlements on your compensation or damage claim. This amount can be hundreds of thousands of dollars. So, since you are getting this massive amount of money, are car insurance settlements taxable?

The most straightforward answer to this question is a straight ‘NO’. According to the Canada Revenue Agency, car accident insurance compensation is not a taxable income. You are not incorporated to document the compensation amount you receive as your disposable income. As a result, any tax may be incurred over the settlement amount, is non-payable.

However, there are certain cases when you have to pay taxes. Moreover, the tax issue on your car accident insurance settlement may vary in specific scenarios. For instance, you may have to pay tax on your physical and emotional pain and suffering, or you may not. This depends on the situation. To know more you can consult a personal injury lawyer Surrey in Canada.

Let us have a thorough review of what is taxable and what is not.

Settlement for Lost Wages Is Taxable

The compensation you receive for your lost wages is meant to be a replacement of what you would have earned if the accident had not occurred. This also includes future wage loss compensations, provided that you fail to recover from your injuries. Wages are always taxable. So, the benefit that you receive for your lost wages is also taxable.

The certainty of paying taxes on lost wages settlements, also makes it a tricky matter. You might have to pay taxes for a long period, considering your injury recovery. As a result, the total tax you pay may accumulate to an amount that is higher than your actual wage pay tax.

Furthermore, you may even receive a higher amount of compensation than your actual salary. So, the annual tax payment from your salary will be much lower than what you will be charged for the insurance settlement.

Moreover, having an attorney is another way that can actually increase your tax payment. Your tax is incurred on the total settlement cost. Although your personal injury lawyer will receive a third of your compensation amount, your total taxable amount just might increase a lot.

No Tax on Settlement for Medical Bills

Whatever injuries you may suffer from, your medical bills will not incur any tax. This is a great sign, as most MVAs result in the claimant falling victim to general and severe physical injuries.

However, there are exceptions. The compensation you receive for your medical bills, you will have to include that as your income. This will also include the tax-exempt benefit in your income. Suppose your medical expenses are carried for more than a year. In that case, you will have to include medical compensation in income on a pro-rata basis.

Nevertheless, the tax exemption on medical bills for your personal injuries from accidents is a great advantage for people who have been involved in severe fatalities.

Taxes Will Vary on Settlement for Pain and Suffering

If the damages from the accident are limited to only physical pain and suffering, the compensation reward in non-taxable. However, if your pain and suffering include mental distresses, you will have to pay taxes.

For instance, you were not injured in an MVA, but you developed a fear of driving. This emotional distress is taxable. In contrast, any mental distress that results from a physical injury, will not be taxable.

So, it is quite clear that car insurance settlement on pain and suffering will sometimes be taxable and other times be the opposite.

Ways You Can Reduce Car Insurance Settlement Taxes

Structured settlement

Suppose the compensation you receive is a large amount of money. Instead of receiving the payment in a cluster, you can decide to get the money over an extended period. This is called “structured settlement”.

It is statistically proven that this method can reduce the tax amount between 25% to 35%.

Classify your damages smartly

There are 2 types of damages from an MVA.

  • Special damages are easy to quantify. Lost wages are an example of special damages. As you can presume, this kind of damages is taxable.
  • General damages are pain and suffering caused by the MVA. As already mentioned, these are not taxable, generally.

So, you should look to negotiate on a settlement, which classifies your damages in such a way that reduces the taxable amount.

Read this also: How To Prove You Are Not Faulted In A Car Accident?

Conclusion

Car accidents can be quite catastrophic. Any legal procedure following a severe accident can be complex and tricky. The answer to the common question- is car insurance settlements taxable, can vary according to the case. It is always recommended to consult a personal injury lawyer for your best interest.

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