Do I Need to Pay Tax on a Vehicle Accident Settlement in Illinois?

Published on: 06/01/21 — In  -

After sustaining bodily injuries in a car accident, you may have to endure months of fighting for financial compensation from an insurance company or the person responsible for the crash. Occasionally, insurers quickly admit their policyholder’s fault and their liability for your financial losses. Unfortunately, you may need an experienced personal injury lawyer to fight on your behalf, prove the other party’s responsibility, and negotiate a fair settlement.

But once you get your car accident settlement, you’ll probably feel a flood of relief when you finally receive the check to cover your medical bills, lost income and help you get caught up on your bills. However, there’s one more element you must consider before using all the money you receive–taxes.

Chicago car accident attorney Chris Ktenas

If you received financial compensation for personal injuries, you should learn if you have to pay tax on a vehicle accident settlement in Illinois. Your financial settlement may be entirely tax-exempt, or you may owe the IRS or your state money based on a portion of your settlement as income. If you can expect a tax liability, you should maintain some of your financial compensation to cover this expense at the end of the year.

Contact the experienced Chicago car accident attorneys of Ktenas Injury Lawyers at (312) 300-2515 to learn more about the potential tax obligations of a car accident settlement.

Are Personal Injury Settlements Taxable in Illinois?

Often, your settlement funds for personal injuries caused by a car crash are nontaxable. This is because the settlement you receive directly compensates for your financial losses. Thus, it has no positive or negative effect on your income. So, you are not required to claim personal injury settlements for tax purposes.

However, if you take an itemized deduction for medical costs related to your physical injuries, you must report your personal injury compensation as well. If your medical bills are used to deduct taxable income, your personal injury settlement should offset that deduction up to the total of your medical expenses. If you deduct your medical costs in one year and receive a personal injury settlement in the next year, you’ll need to claim the financial recovery as income in the year it is received. However, you only have to claim an amount up to what you deducted in the previous year.

A woman talking to an insurance adjuster after a car accident.

If you’re unsure about how to claim your car accident settlement on your taxes, talk to an experienced auto accident attorney or a financial professional to determine what tax benefit you received and how much of your monetary settlement you must include on your taxes.

Is Pain and Suffering Settlement Taxable?

Car accident injuries cause more than a financial loss for medical care. Also, they can cause significant pain and suffering. You can recover money from the at-fault driver to make up for this pain. Obviously, no amount of compensation will ever get your old body back. Still, money is the best that the legal system can do, so you should get some monetary compensation for pain and suffering if you have sustained severe injuries.

The money you will receive depends on the severity of your bodily injuries. If you’re uncomfortable for a few months, you will receive less money than if you suffered permanent disability or are permanently in pain. The money you receive in a car accident settlement is an approximate amount a jury awards based on the evidence. Typically, jurors use their life experiences to come up with an amount that’s fair.

Since pain and suffering damages arise from your physical injuries, the IRS doesn’t require that you pay taxes on this amount. Thus, damages for pain and suffering are nontaxable just like the financial compensation you received for medical expenses.

Are Insurance Payments for Property Damage Taxable?

Also, you may receive compensation for damage to your car or other property in a cash settlement. It’s essential to note this amount is also not taxable, whether the money went to the costs of repairs or to reimburse you for renting a car after the automobile accident. Again, you’re being reimbursed for out-of-pocket expenses, so it would be unfair to tax this amount as income. However, only a tax professional or an accountant can evaluate your specific situation concerning your taxes.

Although most motor vehicle accident settlements are primarily related to your physical injuries, a portion may be to compensate you for damage to your vehicle or other personal property. This portion of your car accident settlement isn’t taxable. Because it directly reimburses you for losses suffered. Thus, it has no positive or negative effect on your income and doesn't have to be taxed.

Having an auto insurance company declare your car a total loss after a motor vehicle collision is devastating. However, auto insurance companies pay the actual cash value or market value of your original vehicle so you can replace it with a similar one. However, if your car is totaled after a car accident, you may not get a new car. This is because the replacement cost isn’t sufficient to pay for a brand-new version of the car you lost. Instead, you’ll receive what your vehicle is worth at the time of the car crash.

Also, insurance companies might be responsible for other costs associated with buying a new car, including sales tax, title, and vehicle registration.

Is a Car Accident Settlement Taxable Income?

Basically, you don’t need to pay any taxes on your car accident insurance settlement. However, often with tax law, there are exceptions to the general rule. It depends on what types of financial damages you received compensation for in your auto accident insurance settlement.

Often, if you didn’t take an itemized deduction for the specific physical injury in previous years, then your insurance settlement from bodily injuries and sickness is nontaxable. This will save you a substantial amount of money, allowing you to use the entirety of your motor vehicle accident insurance settlement for getting back on your feet.

Physical injury is the primary reason many car accident victims file a personal injury lawsuit or seek a settlement from the responsible party. These physical injuries can cause an auto accident victim to incur tens of thousands of dollars in medical treatment, if not more. When bodily injuries are severe, victims may need medical treatment for years in the future.

As part of a personal injury settlement, you can recover financial compensation for the following out-of-pocket medical expenses:

  • Hospitalization
  • Surgery
  • Rehabilitation
  • Doctor’s visits
  • Prescription drugs
  • Over-the-counter medication, and
  • Medical assistive devices, such as a wheelchair or crutches.

Damages for medical treatment should be based on your out-of-pocket medical costs and any expected future medical care. The compensation you receive for medical care is excluded from your income according to the IRS; thus, you won’t have to pay income tax on it.

Do You Pay Tax on a Vehicle Accident Settlement in Illinois?

Many motor vehicle accidents leave our clients in considerable pain, and they often have to stay at home or in the hospital for months or more so they can heal. During this period of time, many of them can’t work, so they lose their income. In a car accident insurance settlement or jury verdict, car crash victims can receive monetary compensation to make up for lost wages.

After suffering severe physical injury, motor vehicle crash victims can also receive lost future income as well. For instance, if a person is paralyzed from the waist down and he or she can’t return to their old job as a delivery driver. And if they can qualify for other work, it pays far less than their previous job, so they’re losing out on money even if they return to work. As a result, this person can receive reimbursement for this lost future income.

However, you must report the compensation benefits you receive for lost wages on your income tax return. That’s because your income would have been taxed had you been able to work. Thus. it’s only fair that the monetary compensation you receive to make up for lost income is also taxed. Thus, you must include it in your gross income at tax time.

Occasionally, some car crash victims receive punitive damages as part of a personal injury settlement or jury award. Punitive damages also known as exemplary damages are in a class of their own. These damages aim to punish the at-fault party for negligent behavior, hoping to deter reckless behavior in the future. In Illinois, you can only receive punitive damages if the liable party’s conduct was more serious than just mere negligence. Car accident victims can receive punitive damages, especially if the at-fault driver intended to injure them or showed a conscious disregard for the traffic safety and rights of others.

For instance, a driver who sees a crowd in the street in front of them and intentionally drives into it has exhibited the type of reckless behavior that warrants punitive damages. This negligent conduct is so serious that Illinois allows punitive damages to deter future reckless behavior like this.

Usually, punitive damages are awarded in a trial rather than in an out-of-court settlement. This is because a jury determines how much is appropriate to punish the negligent party. Further, in Illinois, there are no caps on the number of punitive damages. However, unlike medical expenses and pain and suffering, you must report your punitive damages on your tax return. That’s because punitive damages don’t reimburse for your out-of-pocket losses. Thus, it’s only fair that you pay tax on these amounts. You must include the amount you receive for punitive damages on your income tax return.

At Ktenas Injury Lawyers, we represent motor vehicle accident victims, and we fight to get them the compensation they deserve to cover their medical bills, lost wages, property damage, pain and suffering, and other damages. Our legal approach aims to make you “whole,” so that you’re not needlessly suffering financially after a car accident that wasn’t your fault.

Thus, our defense team will fight fiercely to maximize the amount that you can receive for mental anguish, pain and suffering, and other damages. To schedule a free initial consultation, contact our personal injury law firm today at (312) 300-2515, or chat with us online to learn how we can help.