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When you first meet with our Cincinnati car accident attorney, they’ll do their best to answer any questions you may have. Of course, you have limited time during your free, initial consultation. You want to make sure you cover the high notes right away so that you can decide if you want to retain our services. One of the things you may want to discuss is the tax implications of settling your case. While it’s still in your best interest to settle rather than go to trial, you still need to be aware of what will happen to your settlement proceeds.
Here, we will discuss the tax consequences if you settle your case for a lump sum. We will also explain which types of damages are subject to taxation as opposed to the types that will be exempt. If you still have questions or concerns about your own car accident lawsuit, give our office a call. We can schedule your free, initial consultation by phone, or you can do so through our website.
There Is a Good Chance at Least Some of Your Settlement Will Be Taxed After a Car Accident
They always say that the two things you can’t avoid in life are death and taxes. When it comes to your car accident settlement, the same rule applies. Aside from any damages that your Ohio injury lawyer gets you for your medical bills, your settlement proceeds will likely be taxed. It’s important that you make sure you include your settlement monies as income on both your state and federal tax returns. The good news is that not all your settlement proceeds will be taxable income.
According to federal tax guidelines, any damages you receive that are directly related to physical injuries or an illness are exempt from any tax. For example, if you receive compensation for any medical bills you experienced, it would not be taxable. The same would be true for any money you receive for damage to your vehicle. Since this money is not income in any respect, it should also be exempt.
The way the government sees it, you owned a vehicle prior to the crash and that vehicle had a certain value. If the defendant is forced to pay the costs of any repairs for restoring your car or SUV to its pre-accident condition. The same is true if your car is considered totaled by the insurance carrier. Since you would only be entitled to the fair market value for your car, you would not have to pay tax on these damages.
For the other types of damages, you may have to include them as income for tax purposes. For example, if you receive a lot of money in pain and suffering, it would be considered income. Since this money does not represent any economic damages you physically suffered, it would be considered income. The same would be true if you received any money for punitive damages. Since these damages are intended to punish the defendant, you would have to claim it as income on your federal and state taxes.
Your Settlement Agreement May Apportion Certain Amounts to the Various Types of Car Accident Damages
What your Cincinnati car accident attorney might do is have your settlement agreement itemize your damages. In other words, the settlement agreement would outline exactly how much money is earmarked for each type of damage. For example, if you receive $50,000 in lost income, it would be labeled as such in your settlement. The same is true for damages for physical injury or illness. Whatever amount is designated as compensation for these things would be exempt from income for tax purposes.
One thing you need to think about is whether your settlement will bump you up to a higher tax bracket. Most people are taxed at a minimum rate of approximately 28%. This includes all federal taxes, including FICA, SSDI, etc. For some people who earn a higher income, they are already in a higher tax bracket. By the time you add your total settlement to your actual income for the year, you may end up in a much higher tax bracket. This means you will net a lot less than you think you will.
What your Ohio injury lawyer may be able to do is arrange for your settlement proceeds to be paid out over a course of a few years. This way, you won’t be hit with a higher tax bracket all at once. Instead, your income would only increase slightly for the years in which you receive partial payment.
Let Your Cincinnati Car Accident Attorney Help You Figure Things Out
When we first meet with car accident victims, they have a lot of questions. Many of these questions have to do with how much money their case is worth. While our Cincinnati car accident attorneys can never give a client a precise value for their case, they will give you a ballpark figure.
Once our clients have an idea of what their case is worth, they start to worry about the tax implications of settling their case. They ask our Ohio injury lawyers if there are ways to try to avoid paying these taxes. Things can get complicated rather quickly. That’s why we suggest you speak with an experienced Cincinnati car accident attorney sooner rather than later.
One of the reasons your Ohio injury lawyer encourages you to settle your case is so that you don’t have to wait years for your money. In most cases, your settlement will be paid to you in one lump sum. In other cases, your attorney can arrange it so that you receive quarterly or annual payments instead. What you need to figure out is what works best for you from a tax perspective.
If you still have questions about your case, contact our office directly. We offer new clients a free, initial consultation. This gives you the opportunity to sit down with someone who knows the law and knows how to negotiate a settlement. If you are worried about your settlement pushing you to a higher tax bracket, let your Cincinnati car accident attorney know early on. This could impact the kind of settlement they arrange for you. Since the consultation is free, you have nothing to lose.
