Are car accident settlements taxable in Idaho? Car accident settlements are typically not taxable in Idaho. The Idaho State Tax Commission and the IRS do not consider most economic and non-economic damages to be income and therefore do not tax them as traditional income.
There are some exceptions to this, and it is always wise to speak to a tax professional and a Boise car accident lawyer if you are unsure of how this applies to your situation.
Most Types of Compensation Received in a Settlement Are Not Taxable
The victim of a car accident or other type of personal injury matter has the right to pursue financial compensation from the at-fault parties involved. This means documenting the types of financial losses, physical injuries, and emotional implications, and placing a value on them, all backed by evidence.
In doing so, the following are common types of compensation typically paid out in a car accident that are not taxable by the IRS or Idaho State Tax Commission:
- Medical costs from the accident, including emergency care, medications, physical therapy costs, hospitalizations, or other medically necessary care you received
- Expected future costs related to your medical needs, such as in-home care costs, long-term mental health support, or modifications to your home
- Pain and suffering claims, including compensation for the physical suffering you endured during the event and throughout your recovery
- Emotional distress compensation claims, including those for suffering from post-traumatic stress disorder, depression, and anxiety
In these situations, you are not receiving income from the at-fault party, but restitution for the losses they caused to you. Because it is not income, but payment for the injuries and suffering you experienced through no fault of your own, there are no applicable taxes on these funds. This specific focus will be clearly marked, and the money you receive is expected to be applied to these areas.
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Lost Wages in a Settlement May Be Taxed
Many people who suffer serious injuries after a car accident cannot return to work for a period of time. During that time, they may not receive compensation from their employer, may have to pay for medical benefit coverage, and may even miss out on bonuses or overtime they would have received. These damages are taxable.
These damages are specifically meant to help you recover from the lost earnings you did not receive. Had you worked, you would have paid taxes on these funds, and therefore, the IRS expects you to pay taxes on the compensation recovered specifically for lost wages.
The amount of taxes paid depends on your earnings and your current tax rate. These funds are taxed at the same rate that any other earnings you would receive are taxed. It is much the same as receiving a paycheck in terms of the amount and type of taxes paid.
Punitive Damages in a Settlement Are Taxed
Punitive damages are not a recovery of your losses and are not a form of compensation to you. Rather, they are meant to punish the person who did this to you and, as such, deter them from engaging in the same behavior again.
These are very rarely awarded and are only applicable in situations where the court believes the person acted in an egregious or grossly negligent manner. Drunk driving or intentional acts are some examples that may apply.
You receive the funds awarded by the court in punitive damages. Because these funds are not compensation for your losses, and you are awarded the money, they are taxable. The IRS treats them as income, and you will pay taxes on them the same as you would any other income you earned for that year.
Punitive damages can be significant, and that means you could pay a significant amount of money in taxes. You will have insight into what your financial obligations are when you receive the funds, as the IRS and the state are alerted to these funds, as they would be any other income earned by you during the year.
Work with a tax professional and a Boise personal injury lawyer to minimize the taxes you pay.
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Other Situations Where Settlements Are Taxable
There are other situations where you may pay taxes on the damages you recover, and again, it is always wise to speak to your attorney and your tax professional about any applicable taxes.
The following are some examples of situations where you may also pay taxes on the income received:
- Interest payments: In some situations, you may have pre-judgment or post-judgment interest earned. This is money that is earned while the funds sit and grow over time. The interest itself – the amount you earned in interest alone – may be taxable by the IRS and the state of Idaho as income tax.
- Medical deductions: Some people take a medical deduction for all of the medical costs they paid during the year. If you used this deduction because the medical costs associated with the accident warranted it, then you may have to pay taxes on those funds. For example, if you previously claimed a tax deduction for those expenses from the accident, and then you received compensation for those medical expenses in the settlement, the portion becomes taxable.
In all situations, it is wise to learn more about your tax obligations by visiting the IRS website (Tax implications of settlements and judgments) and speaking to the state of Idaho’s taxation department.
Taking these actions protects your right to compensation and ensures that you do not underpay or overpay taxes and face fines and other costs later.
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Seek the Guidance of a Car Accident Settlement Attorney in Idaho
Before you make a claim or agree to terms offered by the insurance company, speak to a car accident attorney in Idaho to go over your rights in these situations.
At Siegfried & Jensen, our team is dedicated to providing you with exceptional legal support so you can maximize the amount of compensation you receive in a car accident settlement. Request a free consultation to review your claim and your rights for recovery.
Call or text (801) 266-0999 or complete a Free Case Evaluation form
