If you have been seriously injured in a car accident due to someone else’s negligence or an intentional wrongful act, you can file a claim against that party to recover compensation for your losses. If your claim is successful, you may receive payment for monetary damages. It’s important to note that portions of personal injury settlements are taxable in Alabama, meaning the government will take a cut of your award. Understanding the tax implications of a personal injury settlement is crucial to mitigate unnecessary tax burdens and maximize your financial recovery. Please continue reading to learn how taxes are handled when awarded personal injury compensation and how a qualified Birmingham Car Accident Lawyer can represent your interests.
Are Auto Accident Settlements Taxable in Alabama?
If you have been involved in a car accident in Alabama, your personal injury settlement is not taxable on the federal level. Essentially, damages from personal injuries are tax-exempt as they are intended to reimburse victims for the losses they have wrongfully endured. This means the IRS will not take any portion of your compensatory damages. Compensatory damages are awarded for out-of-pocket expenses like medical bills and subjective losses like pain and suffering. Funds for your medical bills are never taxable as these benefits are designed to make you whole again. If the government did take a share, you would not be able to cover the total cost of your medical expenses, including hospitalization costs, prescriptions, rehabilitation, etc. Therefore, compensatory damages are generally not taxable in Alabama.
Are There Any Exceptions?
In some cases, a defendant’s conduct may have been so egregious as to warrant an award of punitive damages. Unlike compensatory damages, these funds are awarded to punish the defendant for gross negligence and deter others from engaging in similar conduct in the future. These damages are taxable because they are not intended to reimburse victims for actual losses. Another tax exception is if the defendant doesn’t immediately pay the accident settlement amount. If an accident settlement is delayed, interest will accrue over time. Once the defendant pays the settlement, it will be deemed taxable income.
Furthermore, if emotional distress or mental anguish compensation stems from physical injury or physical illness, it is not taxable. However, claims that stem from non-injury claims may be taxed by the state or federal government. Emotional distress or mental anguish attributable to a physical injury or sickness will be excluded from income. Proceeds that don’t originate from a physical injury or physical illness will be taxed.
At Alabama Personal Injury Lawyers, LLC, we are prepared to help you maximize your settlement and understand your tax obligations when compensated for your losses. If you have been injured in a car accident due to another driver’s negligence, please don’t hesitate to contact our dedicated legal team, who can help you take the necessary steps to avoid unnecessary tax bills.
