Accident Settlement Procedure
- Car accidents fall under the jurisdiction of the state where the accident occurred in most cases. As a result, state laws govern the lawsuit and settlement procedures. There are, however, basic steps that occur in all car accident lawsuits. The victim generally negotiates with the defendant, or defendant's insurance company, in an attempt to reach an out-of-court settlement for the victim's injuries. If an out-of-court settlement is not reached, then the victim files a lawsuit in the appropriate court. A settlement may still be reached before the case is scheduled for trial or a judge or jury will decide if the defendant was negligent and, if so, what damages are due the victim.
Federal Taxable Award
- The federal government, in general, requires you to pay taxes on anything that is considered income. Court awards or damage settlements may be taxable, depending on the purpose of the compensation. Compensation paid for lost profits or wages as well as punitive damages are almost always taxable. Interest on a settlement along with attorney fees and costs, if the fees and costs are for compensation which is considered taxable, are also taxable. If attorney fees and costs are included in your gross income, you may be able to then claim them as a deduction.
Federal Non-Taxable Award
- As a general rule, compensation for physical injuries or a physical illness that is a direct result of a car accident is not taxable for purposes of your federal tax obligation. Emotional distress, pain and suffering, or other non-economic damages that are paid to you and are considered to be caused by a non-taxable physical injury or illness, are also not taxed by the federal government.
- Along with federal taxes, you may be subject to state taxes in the state where you file your state tax return. Many states follow the federal rules regarding car accident settlements for tax purposes; however, state laws vary. If you are represented by an attorney, check with your attorney before you accept a car accident award to determine what portion, if any, will be subject to taxation as there are exceptions to the general rules and each circumstance presents a different set of facts.