Are Motor Vehicle Injury Settlements Taxable in Connecticut?

Posted on 10/18/23

If you won a hefty settlement or award with the help of a Connecticut car accident attorney, it probably came as a relief. That money can go a long way toward paying for medical bills, and it’s especially helpful if you’ve lost your paycheck while you take time off work to recover.

Before you go on a spending spree after winning your car accident case, though, you’ll need to pay special attention to the tax implications of your settlement. That settlement may seem like free money, but it’s important to know that the funds will be taxed.

Learn what’s taxable and what’s not when it comes to Connecticut car crash settlements.

Taxes for Medical Expenses

If the insurance company gave you a settlement to compensate you for your physical injuries, scarring, disfigurement, or mental anguish, you’re not obligated to pay taxes on that money. However, once you use that money to pay for medical expenses, you’ll need to count it as income on your taxes.

Insurance companies often calculate settlement damages based on medical expenses you already paid and those you expect to pay in the future. If you’ve already paid your medical bills and deducted those expenses on your taxes before the insurer gave you your settlement, you’ll need to account for the portion of the settlement you took as past deductions. Record it as “other income” on your taxes.

Taxes for Lost Wages and Future Earnings

Many types of car accident settlements include money for lost wages, and some compensate you for a loss of future earnings if you’ve become too disabled to work. Just as the IRS taxes you on income from your job, you’ll also have to pay taxes on settlement money that covers lost wages.

You must account for this income as wages for the tax year in which the insurance company gave you the money.

Taxes for Property Damage and Loss of Value

It can be tricky to understand taxes for the property damage portion of your settlement. According to the IRS, settlements for less than the adjusted basis of your property aren’t taxable. If your Connecticut car accident attorney helped you win a settlement that’s worth more than your property, though, it counts as capital gains. This means you must pay taxes on that part of the settlement.

For instance, let’s say that you were in an accident in your old car that was worth about $5,000, but the settlement awarded you $10,000 for property damage. You’d have to pay capital gains taxes on the $5,000 difference.

Taxes for Punitive Damages

If your car accident case goes to trial, the judge may award you punitive damages if the defendant acted maliciously (for example, they deliberately ran you off the road). If your award includes punitive damages, you’ll need to pay taxes on them. 

Taxes on Interest

If you earned any interest on settlement income, the IRS requires you to pay taxes on it. Record it as “interest income” on your taxes.

Are Attorney Fees Deductible?

Many attorneys work on contingency, which means they take their fees from your settlement or award. You may think you can deduct those fees from your taxes, but unfortunately, this isn’t true. You’ll need to calculate reportable income based on the total settlement amount, not what’s left over after the attorney takes their cut.

Reach Out to Us if You Need Help Understanding Taxes for Your Personal Injury Settlement

At the Law Offices of James A. Welcome, we know that figuring out taxes can be confusing for car accident victims. If you have questions or need a Connecticut car accident attorney to represent you for your car accident claim, call us at (203) 753-7300 for a free case evaluation today.