Are No-Fault Benefits and Car Accident Settlements Taxable?July 8, 2022
In many cases, no-fault benefits and car accident settlement amounts are taxable, but in other cases, they are not. Property damage and medical bills are not taxable because the compensation is intended to reimburse the victims for their expenses. Lost wages, however, are taxable because they are treated like wages earned at work. Interest on judgments is also taxable. These differences make it difficult for people to determine which of these damages are tax-exempt.
Structured settlements are tax-exempt
A structured settlement provides a steady stream of payments over a long period of time to injury victims. These payments can help pay for lifetime care and medical expenses, as well as replace lost income. If a person is permanently disabled, they may not be able to work and need financial support. Others may have died in the accident, thereby requiring a structured settlement to replace their income.
In Michigan, no-fault insurance law requires injured individuals to first contact their own insurance companies to seek compensation. These companies pay for the first three years of lost wages, up to 85% of their normal wage, for any injuries sustained in the car accident. However, once the first three years are up, injured individuals may file a lawsuit against the person at fault for the accident. This lawsuit can include interest on accumulated damages, which is taxable.
The amount of lost wages you’re entitled to from a no-fault benefits or car accident settlement will vary depending on your injury and the value of your medical bills. A car accident can be particularly costly for an individual. During the recovery process, you might have to miss several weeks of work. To calculate your lost wages, you’ll need to use a calculator. Your physician’s note and disability slip may also help prove how much you lost.
Most car accident claims are governed by personal injury law. Damages represent the injured person’s losses incurred as a result of the accident. These damages fall into two categories: special and non-economic. Special damages include the cost of medical bills and lost earning capacity. Non-economic damages, on the other hand, refer to pain and suffering. Non-economic damages are based on the suffering of the injured person, not the financial costs of the accident.
Punitive damages are not part of car accident settlements
If you’ve been involved in a car accident, you’re probably wondering what to expect in terms of monetary settlement. You may be surprised to find that punitive damages are rarely awarded. These are essentially extra damages awarded in addition to compensatory damages. They are meant to punish the party responsible for the accident – usually the person who caused it – by deliberately doing something that hurt or killed another person. Punitive damages are typically reserved for extremely egregious and criminal behavior.
Compensation for pain and suffering is non-taxable
The compensation for pain and suffering awarded in a no-fault car accident settlement or no-fault insurance policy is not taxable income, even if it is a portion of the amount of property damage. Pain and suffering is an incredibly important part of any lawsuit, and the damages should be based on the emotional and physical discomfort you experienced. Since medical bills are tax-deductible, compensation for pain and suffering is not taxable income.