If I receive compensation for a motor vehicle accident, do I have to pay taxes on this amount?

In most cases, car accident settlements are primarily compensation for pain and suffering caused by the accident. This refers to damages for the physical and emotional distress, as well as the disruption to your daily life, that you wouldn’t have experienced if the accident hadn’t occurred. Legally, this type of compensation is known as compensatory damages.

The good news is that compensation for pain and suffering is not considered taxable income. This is because it’s not income in the traditional sense. It’s meant to restore the life you would have had if the accident hadn’t happened, free from pain and inconvenience.

However, if your settlement includes compensation for lost wages, which is the money you couldn’t earn because you were unable to work for a certain period, this portion may be subject to taxes. The reasoning is that but for the accident, you would have earned that income and paid taxes on it. Therefore, compensation for lost wages can be taxed in the same way as regular income. If you’ve received compensation for lost wages, it’s a good idea to consult with a professional accountant.

Lastly, some people wonder if receiving a settlement could affect their eligibility for government benefits like Medicaid. While compensation for pain and suffering is not taxable income, if you receive a large settlement in your name, it may be considered an asset. Social welfare programs like Medicaid consider both income and assets when determining eligibility. If you’re currently receiving benefits, it’s important to consult with an expert before accepting a settlement to understand its potential impact.

(The above content does not constitute legal advice or consultation from 'Lee & Kim Law’)

Lee and Kim Law LLC

375 Sylvan Avenue, Suite 21

Englewood Cliffs, NJ 07632

 

Call Us At: 551-300-2766

Website Instagram Facebook Youtube