Are Auto Accident Settlements Taxable in CA?

Settlements from personal injury lawsuits in California are not taxable as long as you do not take an itemized deduction for your medical expenses.

Even though some people consider it tacky, it is a lot of fun to brag about your money; if it were not, social media would be a very different experience. At high school reunions and neighborhood block parties, it is tempting to pretend that you have more money than you do and to act as though it does not hurt to pay your kids’ college tuition and the mortgage on your beautiful home. With the IRS, though, the natural impulse is to tone down your financial fabulousness at full volume about your expenses. The good news is that most of the time, settlements from car accident lawsuits do not count as taxable income (and the even better news is that, even in a community property state like California, they do not count as marital property in divorce cases). The bad news is that it is harder to make the argument that your personal injury settlement is not taxable if you have been taking itemized deductions for your medical expenses. Therefore, the simple yes/no question of whether personal injury settlements are taxable is so complicated that it requires the expertise both of a professional tax preparer and the Murrieta personal injury lawyers at Gibbs & Fuerst, LLP.

You Can Tell the IRS That Personal Injury Settlements Do Not Make You Rich

The news headlines about court decisions that award huge amounts in damages to injured plaintiffs might lead you to believe that the plaintiffs end up wealthier than they were before the accident, but this is not the case. The compensation awarded (or settled on) in a personal injury case is simply the defendant reimbursing the plaintiff for the financial losses that the plaintiff suffered because of the defendant’s negligence. If you do not know that it is possible to suffer a million dollars in financial losses because of a car accident, it is because you have not suffered a permanent injury that left you disabled and unable to work after previously holding a job that enabled you to provide for your family. Since the lawsuit money does not make you wealthier, it does not fit the IRS’s definition of income.

Personal injury cases usually take more than one year to reach a settlement, and much longer than that to go to trial, and you have to survive somehow until your case resolves. If your medical expenses in a given year exceed 10% of your income, you can take an itemized deduction for those expenses. You cannot do this when you receive a personal injury settlement, though, because the IRS considers it double dipping.

Contact a Murrieta, California Car Accident Lawyer

A car accident lawyer can help you recover damages if you have suffered serious injuries in a car accident, and you will not have to pay taxes on it. Contact Gibbs & Fuerst LLP in Murrieta, California to take the next steps toward recovering compensation after your accident.