Do I Need to Pay Tax on a Vehicle Accident Settlement or Judgment?

Source: www.nolo.com

If you have received a settlement or judgment following a vehicle accident, you're probably wondering, “Do I have to pay taxes on that money?” The short answer is, “In most cases, no.” However, that is not a hard and fast rule, and the answer depends on the nature and circumstances of your settlement or judgment.

It is important to know that only your tax advisor can give you tax advice. The comments in this discussion will help you formulate the appropriate questions to present to your tax advisor. Only by discussing these issues with an expert can you be confident that you are receiving the most current tax information.

Generally, settlements and judgments are viewed the same when it comes to the question of taxes. So, it doesn’t matter whether the money you received is through a settlement at the claim stage, or through a judgment following a trial.

How Does the Tax Code Affect My Settlement?

The applicable language of the Internal Revenue Service (IRS) regulation addressing the question of taxability of settlements and judgments is found at 26 C.F.R 1. It reads in part:

§1.104-1 Compensation for injuries or sickness.

(c) Damages received on account of personal physical injuries or physical sickness—(1) In general. Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2). Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care (described in section 213(d)(1)(A) or (B)) for emotional distress.

Money Received for Medical Expenses and Injuries

The vast majority of settlements and judgments are for only "compensatory damages" and "general damages." Those categories of damages are meant to compensate you for your medical expenses, lost wages, and the pain and suffering that arises directly from your injuries.

In a typical settlement where you receive only compensatory and general damages for your physical injuries and medical expenses, most of that amount is usually not subject to taxes. This is because that type of settlement or judgment is meant to reimburse you for your out-of-pocket losses.

Money Received for Vehicle and Property Damage

Any compensation you receive for vehicle damage resulting from a car accident is not taxable. This is true for the costs of repairs that were paid as well as any reimbursement you might have received for a rental car while your vehicle was in the repair shop.

Compensation for Lost Income

Generally speaking, any settlement or judgment amount you receive as compensation for lost income is subject to income tax. The reasoning is that your original income would have been taxable had you not suffered the income loss, so any compensation intended to replace that same lost income should be taxable as well.

If your settlement or judgment includes compensation for other types of losses in addition to lost wages, such as medical bills, you must still pay taxes on that portion of the settlement or judgment that is attributable to the lost wages.

What If I am Awarded Punitive Damages?

It is rare that punitive damages are included as part of a car accident settlement or judgment. This category of personal injury damages is usually intended as just what the name implies -- punishment against the defendant -- and to deter future bad behavior. They are only awarded in pretty extraordinary circumstances where the defendant has engaged in particularly outrageous or egregious behavior. In the rare even that you do receive punitive damages in a personal injury case, know that those damages are almost always taxable.

Your personal injury lawyer should be able to provide basic information on the taxability of your settlement or judgment. But it is important to remember that most personal injury lawyers are not experts in tax law. So, if you've got more complex questions about the tax implications of a personal injury settlement or judgment, it's best to seek out the advice of a tax professional.

by: David Landers

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Court Rules Debtors Can Sue Collectors Under More Onerous State Laws

The West Virginia Supreme Court of Appeals affirmed last week that consumers can sue third party debt collectors under the state’s Consumer Credit and Protection Act (WVCCPA) – a statute that carries greater punitive damages for violators than the federal Fair Debt Collection Practices Act (FDCPA).

The ruling came June 14th in the case of Linda Barr vs. NCB Management Services Inc. and HSBC Bank of Nevada.  It’s the final say on the issue unless the state legislature changes the law, which is not expected. However, if a new law were passed, it would only apply to future complaints.

The case began in the U.S. District Court for the Northern District of West Virginia. Barr alleged that NCB Management Services violated the act by intentionally inflicting emotional distress on her, when over a two month period collection representatives from the Trevose, Pa.- based debt collection agency repeatedly telephoned her with an intent to “annoy, abuse, oppress, and threaten” her in an attempt to collect nearly $7,900 of unpaid debt on a repossessed motorcycle.

NCB asked the district court to dismiss the case, arguing that the WVCCPA only gives consumers the right to sue creditors. After considering some amendments, District Court Judge John Preston Bailey, in September 2010, asked the Supreme Court to decide, citing conflicting language in the statute.

In its ruling, the Supreme Court noted that it had not been previously defined who or what is considered a creditor, and so determined that a debt collector can be included in that definition based on the intent of the legislatures when the WVCCPA was drafted and passed. That applies whether the agent is acting as an agent for a creditor and violates the law or as the new owner of the debt. The court explained that the WVCCPA is a remedial statute intended to provide broad consumer protection from unfair, illegal and deceptive business practices, and must be liberally construed to accomplish that purpose.

“It logically follows that, insofar as the Legislature intended for Article 2 to apply to professional debt collectors, the Legislature likewise intended to allow consumers to utilize the remedy provisions of Article 5 to seek redress from professional debt collectors,” Justice Robin Davis wrote on behalf of the court.

NCB Management did not respond to insideARM’s inquiry regarding the ruling. The company’s attorney had previously said a ruling in Barr’s favor would leave third party agencies more vulnerable to lawsuits, increase their costs and risk of doing business in the state, and impact consumer lending.

Barr’s attorney, Anthony Majestro, says the ruling does not change how the law has been interpreted in the past.

“We are happy that the court recognized this interpretation of the statute, which is consistent with way everyone always has interpreted the law and as the intent of the drafters back in the 1970s,” Majestro said. “We don’t’ believe anything will change.  There should be no additional burden on the [debt collection] industry that should have been following this law and the parallel provisions of the FDCPA.”

The case has been sent back to Judge Bailey who requested the clarification. Majestro said his office resubmitted the complaint on June 15th and will file amendments to provide more details of the alleged violations of the West Virginia law.

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