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Are car accident settlements taxable in North Carolina? Most of the damages you receive in a North Carolina car accident settlement are not taxable as income. As a result, you are not likely to pay taxes out of those funds.
However, there are some exceptions. When possible, discuss your need to include these funds on your taxes with your accountant and with a Rutherfordton car accident lawyer.
What Is Not Taxable in a Car Settlement in North Carolina?
Many car wreck settlements include several components. Each component may have different treatment under the law based on why you are awarded the funds. Some of the damages you typically do not have to pay taxes on are damages awarded for the following reasons:
- Money for medical expenses: This is not considered income. Rather, it pays your medical bills. It is not more than what you paid out in health insurance coverage or out-of-pocket expenses for your medical care. Damages for hospitalization, rehabilitation, and medications do not get taxed.
- Money received for repairs to your vehicle: Again, this is an expense associated with the accident. The amount you receive depends on the actual cost of repairing or replacing your case. You should not be taxed on these funds.
- Pain and suffering–related damages: You may receive compensation for the physical injuries and losses you experience as a result of the accident, often referred to as pain and suffering. Typically, these damages are not taxable because they are considered compensatory.
It is important to note that you should not have to pay taxes on damages recovered to pay for other losses. Under North Carolina law, though, note that only pain and suffering directly attributable to a physical injury or an illness caused by the accident remains tax-free.
The law applies the same principle to emotional distress from a physical injury. It is compensatory and most often free from taxation.
Are Car Accident Settlements Taxable: Some Types of Damages Are Taxed
There are situations in which you may face tax implications of settlements and judgments at both the federal and state levels. As you meet with your tax professional, be sure to clarify if you received any settlement awards for the following types of losses.
If so, you may have to pay taxes on them:
- Punitive damages: In North Carolina, punitive damages are only awarded as a type of punishment against the at-fault party, and not seen as compensatory damages for you. As a result, you will likely pay taxes on any punitive damages awarded to you under your taxable income rate. Punitive damages are nearly always taxable at both the federal and state levels.
- Interest: Some situations result in payments for losses taking a long time to reach you. If money is sitting and earning interest, that interest is a type of income you receive. You are likely to pay taxes on this interest because it is not compensatory damages but rather income earned from your assets.
- Compensation for emotional distress not related to injury: The law does not recognize emotional distress in the same way, and as such, you can expect to pay tax on any compensation you receive for emotional distress not applied directly to physical injuries. For example, it may not apply if you are awarded damages for the traumatic experience.
In each of these situations, work closely with your attorney to determine what your losses are. Your lawyer will help you classify what any compensation you receive is for so that you have a better idea of whether those funds are taxable or not. Speak with our Rutherfordton personal injury lawyer today.
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How Lost Wages Are Taxed in an Accident
One factor in whether car accident settlements are taxable concerns reimbursement for lost income. If you are out of work for several days or weeks due to your injuries, that can amount to significant damages. These are referred to as lost wages.
Lost wages are taxable. That is because they are a replacement for the income that you earned. The value will include your gross income, which is your before-tax income. For that reason, you will pay taxes at the same rate you would if you received a payment from your employer.
You can expect to pay all state and federal taxes on your lost income reimbursement. That includes paying into Social Security. This applies to the loss of future income if you are unable to return to work, or to the loss of earning capacity if you can work but at a lower rate.
How a Car Accident Lawyer Can Help You with Your Settlement
It is important to understand how car accident settlements are taxable in North Carolina. But it also helps to have an attorney who can ensure you file a claim that includes all your losses, maximizing your compensation. Your attorney will:
- Identify all of the parties that are at fault so that you can seek compensation against all of them
- Determine what all of your current and future losses are so that you can seek those damages in a claim
- Negotiate with the insurance company to maximize the amount of compensation you take home in your car accident settlement
With the guidance of a car wreck lawyer, you can be confident that you will know what your case is worth and that the insurance company will treat you fairly. It is always important to have an experienced professional available to guide you throughout this process, one who knows the tactics insurance companies use to minimize losses.
Schedule a Free Consultation with Our Car Accident Lawyer in North Carolina
At Farmer & Morris Law, PLLC, we provide you with answers to all of your questions related to car accident settlements being taxable in North Carolina.
Set up a free consultation with our Rutherfordton car accident attorney to discuss your case and learn about your rights. We have been voted The Best of Rutherford County since 2011 – 2023.
