Auto Accident Compensation

• When a victim is involved in an automobile accident, she has the right to seek compensation for her injuries from the responsible party. State laws determine what type of compensation a victim is entitled to; however, there are commonalities among the states. In most states, a victim may be entitled to compensation for economic damages, such as medical bills, as well as non-economic damages, such as pain and suffering. Under some circumstances, a victim may also be awarded punitive damages which are not compensatory in nature, but are intended to punish the responsible party.
  
  

Physical Injury or Physical Illness

• Compensation from an auto accident that is intended to compensate the victim for physical injuries or physical illness is not taxable. In most cases, this represents the majority of a personal injury award for an auto accident case. For example, compensation for medical treatment you received as a result of the accident is not taxable. The non-economic portion of your settlement which is related to a physical injury or physical illness is also not included in your income and therefore not taxable. For instance, if you are awarded money for pain and suffering as a result of the physical injuries you suffered in the accident then that amount is not taxable.
  
  

Punitive Damages

• As a general rule, punitive damages are taxable. Punitive damage awards are not allowed in all states. In the states where they are allowed, they are usually only awarded under limited circumstances where the defendant's conduct was particularly egregious. A punitive damages award will be clearly identified as such. The only exception to the punitive damages rule is when the punitive damages award was based on a wrongful death lawsuit in a state where the state law only allows punitive damage awards.
  
  

Other Taxable Compensation

• In addition to punitive damages, there are other parts of an automobile accident settlement which are considered income and, therefore, are taxable. Compensation for lost wages or profits is taxable as it is intended to replace lost income. Interest paid on an settlement or award is also taxable. Any attorney fees that were the result of a taxable award are also taxable. If, for example, your award was for $10,000, and $5,000 of that was for punitive damages, then the portion of the attorney fees attributable to the $5,000 punitive portion of the award are considered taxable. The attorney fees, however, are considered a deduction if they must be included in your income.