Following a car accident, you likely are overwhelmed by the damages you have endured due to another person’s negligence. With few exceptions, the state or federal government may tax the money you can recover from a settlement. Please continue reading to learn what portion of car accident settlements are taxable in Maryland and how a qualified Prince George’s County Auto Accident Lawyer can help you avoid unnecessary tax bills to ensure maximum financial recovery.
Are Auto Accident Settlements Taxable in Maryland?
Under state and federal law, you will not be required to pay taxes on those funds if you receive a settlement for your personal injuries. Compensatory damages are generally not taxable as they are intended to be reimbursed for out-of-pocket losses. Depending on the circumstances of the accident, the court may award punitive and compensatory damages. Punitive damages are not designed to compensate victims for their losses. Instead, they are intended to punish the defendant for their egregious conduct. They also exist to deter reform or deter others from engaging in similar conduct in the future. Punitive damages are only awarded when a defendant is guilty of gross negligence. Since these damages are not intended to reimburse victims for their losses, these damages are taxable in Maryland.
Moreover, if you were involved in a car accident, you may have had to miss a substantial amount of work due to your injuries, rendering you incapable of fulfilling your job duties. Your settlement likely included damages for your lost wages. If this is the case, the IRS will tax this loss as it is comparable to the wages you would have earned and would have had to pay taxes on. This is also true for any business income. Benefits that are lost, the settlement money from those profits may be taxed as business income.
Are Lost Wages Taxable?
It’s common for those injured in car accidents to experience emotional distress, such as depression, anxiety, and post-traumatic stress disorder (PTSD as a result of the trauma. It’s important to note that the IRS does not consider emotional distress a physical injury or sickness. However, damages for emotional distress that originate from a personal physical injury or physical illness are treated in the same manner as medical damages. This means you would not have to pay taxes on compensation for emotional damages that are attributable to a physical injury or physical sickness.
Proceeds from emotional distress that don’t originate from a personal injury or illness are taxed. For instance, if you develop a fear of driving after the accident but not because of your injury, you will be required to pay taxes on those damages. It’s important to note that you may be on the hoo if the court awards interest on the amount of the judgment. If the defendant fails to pay, interest will accrue. Once it’s spent, it will be taxable under state law.
At Timian & Fawcett, LLC, we are prepared to help you understand how taxes could impact your claim. Contact our dedicated legal team today to learn how we can help you minimize your tax liability.
