Are Car Accident Settlements Taxable in California?

As a car accident law firm in CA, we know that being involved in an automobile accident is a traumatic and disruptive event. You must deal with the inconvenience of not having a vehicle or using a rental car while yours is being repaired. You suffer physically, emotionally, and financially.

Nothing about an automobile accident is quickly resolved. It takes time to have the damages to the car assessed and repaired. It also takes time to recover from sprains, strains, bruises, cuts, and broken bones. Once all the expenses of the accident have been calculated, then the negotiations or legal actions begin. While you hope for an easy resolution, you still must replace the vehicle, settle all the debts, and restore yourself to your previous position.

This may be the time you start trying to determine where this accident leaves you financially. You must try to find a car that the settlement funds will cover to replace the vehicle with one of equal or better value. If you hired a car accident attorney, their fee would usually be paid from the settlement. But, what about taxes?

Will Your Settlement Be Taxable?

The easy answer is no. Most of your settlement is not taxable. The following examples are settlements that are not taxable:

• Vehicle damages
• Property damage
• Medical equipment
• Physical and emotional damages

Compensation for Lost Wages

This part of the settlement or judgment is the exception. While the funds mentioned above are not taxed, the compensation you are awarded for lost wages is taxable. If you had not been forced to miss work, then the money you would have earned would have been taxed before you received your pay. Therefore, the concept is that you should pay taxes on the compensation you are paid due to lost wages. Your tax professional or accountant should be able to instruct you on how and when to pay the taxes on the judgment.

Punitive Damages

Punitive damages are often not awarded in car accident cases. Punitive damages are often awarded in cases where the person was found guilty of something so obscene that the court wants to punish them. The court wants the punitive punishment to be harsh enough to make the guilty party hesitate before they repeat their unlawful act. Punitive damages are often awarded in medical abuse cases, crimes against children and seniors who cannot protect themselves, and other cases that are heinous and cruel. Automobile accidents typically do not fit into these categories.

A settlement in an automobile accident is intended to make you whole. Settlements aim to restore you to where you were before the accident, not to let you profit from the accident. However, in the extremely rare cases that punitive damages are awarded, they are almost always taxable. You should seek legal counsel from a car accident lawyer immediately following an automobile accident to ensure the best possible outcome for your case.