As tax season is in full swing, you may be wondering whether or not the settlement you received for your car accident is taxable. Overall, car accident settlements are not taxable in Massachusetts.
In the world of car insurance, damages include payment for any outstanding medical bills, and lost time from work. Damage also includes pain and suffering. Pain and suffering is what really drives the value of your claim. That is what the final settlement will be largely based on. For example, someone who broke a wrist in a car accident is entitled to more damages than someone who had a mild neck or back strain and only went to the hospital a couple of times. Pain and suffering is open to interpretation as to what is reasonable for a given case. Also, pain and suffering damages are not subject to any state or federal taxes. This is one of those rare times when Uncle Sam cannot touch your money.
The IRS states; “ If you receive a settlement for personal physical injuries or physical sickness and did not take an itemized deduction for medical expenses related to the injury or sickness in prior years, the full amount is non-taxable. Do not include the settlement proceeds in your income.” The same follows for emotional distress or mental anguish payments, as they note; “The proceeds you receive for emotional distress or mental anguish attributable to a personal physical injury or physical sickness are treated the same as proceeds received for Personal physical injuries or physical sickness above.” However,‧ If the proceeds you receive for emotional distress or mental anguish do not originate from a personal physical injury or physical sickness, you must include them in your income. However, the amount you must include is reduced by: (1) amounts paid for medical expenses attributable to emotional distress or mental anguish not previously deducted and (2) previously deducted medical expenses for such distress and anguish that did not provide a tax benefit. Attach to your return a statement showing the entire settlement amount less related medical costs not previously deducted and medical costs deducted for which there was no tax benefit. The net taxable amount should be reported as “Other Income” on line 8z of Form 1040, Schedule 1.”
If you have any questions, do not hesitate to contact our office at 617-338-7400.