If you’ve been in an accident and received a settlement to pay for injuries and/or damages, you may wonder if a car accident is taxable income in South Carolina. The short answer is probably not.
However, if you receive a settlement from a car accident, it’s important to seek the advice of a CPA or tax attorney. Below, our Charleston car accident lawyer goes over a few things that you need to keep in mind to help you determine if any portion of your settlement might be considered taxable income.
Are Car Accident Settlements Taxed?
As a general rule, money received through a car accident settlement in South Carolina is not taxable because the purpose of it is to reimburse any expenses accrued due to the accident. However, there are certain portions of the settlement that may be taxed.
Two Categories of Car Accident Settlements
Personal injury settlements fall into two major categories:
- Special, or compensatory: objective, involves measurable losses (lost wages, medical bills)
- General, or non-compensatory: subjective, involves non-economic losses with no measurable costs (pain/suffering, emotional injury)
Special, or compensatory damages, are designed to make you “whole” following your accident. These reimburse you for the money that you lost or will lose as a result of the accident. This portion of the settlement is typically not taxable.
General, or non-compensatory damages, are designed to provide you with compensation that you would not have had if you had not been in an accident. This portion of your car accident settlement is usually taxable.
Taxes on Car Accident Settlements in South Carolina
The type of damages and the state where the accident occurred determine whether or not you will be required to pay taxes on your settlement. When you receive a settlement due to a car crash, it’s important to seek the advice of a CPA or tax attorney. There are certain portions that may be taxed, including:
In South Carolina, like in most states, compensation for lost wages is not taxable. However, there are some states that subject lost wage compensation to federal and state income tax.
If you are self-employed, compensation received as part of a settlement may be subject to income tax.
Medical expenses and property damage
When you are involved in a car crash, you must pay out-of-pocket for medical expenses and vehicle repairs. Any compensation received for these expenses and expenses related to other losses is typically not taxed.
There is one exception: if you have taken a deduction for medical expenses related to your claim in prior years, this portion of the settlement will be taxed to the extent of the deduction.
Punitive damages are used to discourage the defendant from engaging in the same actions in the future. Punitive damages are rare in bodily injury settlements. In order for punitive damages to be included in a settlement, the injury must include willful, wanton conduct, fraud, or malice. Punitive damages are considered taxable income.
If the settlement is awarded through the court, the victim may be entitled to interest on the settlement. Interest paid on settlements is taxable.
Therefore, it’s important to note that while you likely will not have to pay taxes on your car accident settlement in South Carolina, there are some portions that might be taxable. You will need to consult with a CPA or tax attorney to be sure.
Consult with a CPA or Tax Attorney About Your Car Accident Settlement
The rules regarding taxes on car accident settlements in South Carolina can be complicated. Therefore, once you receive compensation, it’s important to schedule a consultation with a CPA or tax attorney before filing your taxes if the compensation was awarded within the tax year.
Even though your settlement is likely not taxable, you don’t want to end up getting an unexpected bill from the IRS when you file and pay your taxes.
Tip to reduce your tax obligation — structured settlements
If your settlement is large, you can choose to receive it in a structured settlement, paid out over an extended period of time. This allows you to exclude some of the payout from your current taxes.
In this case, the car insurance company would purchase an annuity in an amount that will earn enough interest to replace lost wages. Each payment is partially made up of interest, which is non-taxable.
Some portions are taxable, and you’d receive a 1099 form from the insurance company.
Were You Involved in a Car Crash in South Carolina?
If you are involved in a car crash in South Carolina, the Trey Harrell Auto Accident and Personal Injury Attorney team is here for you. We can address any questions or concerns you may have on the way to recovering financial compensation.
Trey Harrell is a former federal prosecutor with expertise in personal injury cases. He believes that every case deserves personal attention. He will work with you and your family to guide you through the entire process.
Trey Harrell takes on car accidents, personal injury, estate planning, and workers’ compensation cases. His experience in the legal system gives him the confidence to support his clients in anything they need. Contact us now to discuss your case.
Call us today at (843) 636-8739 or click here to make an appointment. He will do everything he can to help you get back on your feet following your accident.