- May 10, 2023
- Car Accidents
- Personal Injury
If you were injured in a car accident and were able to walk away with a settlement, you may be wondering whether or not the IRS will require you to pay taxes on it. While these rules vary from state to state, car accident victims in Michigan generally don’t have to because of the no-fault law.This blog sheds light on when car accident settlements in Michigan are taxable and how the no-fault law affects taxation. For more information on what happens during the car accident compensation claim process, contact our car accident lawyers at Goodman Acker P.C. Call us today at 248-286-8100.
Why Choose Our Car Accident Attorneys to Negotiate Your Car Accident Settlement?
At Goodman Acker P.C., we have years of experience helping car accident victims fight for their rights and get favorable outcomes for their cases. Our attorneys understand the laws governing auto accident claims and the Michigan legal system. We also know when your settlement is taxable and when it isn’t.
Our legal team takes a personalized approach to every case we handle, and we strive to get you the best outcome for your case.
Therefore, when you hire us, we will carefully explain to you the provisions of the law as they affect your case. We have a high success rate negotiating settlements for our clients and can help you get fair compensation. Contact us today at 248-286-8100 to schedule a free case review.
Are Settlements Taxable Under Michigan’s No-Fault Law?
Established in the 1970s, Michigan’s no-fault insurance system is mandatory for every car owner. If you have a car accident, no-fault insurance pays for your medical expenses, wage loss benefits, replacement services, and the damage you do to other people’s property — no matter who’s at fault. Thanks to this law, insurance benefits are not taxable in Michigan.
But what about settlements?
Compensatory Damages Are Not Taxable
In Michigan, you are entitled to a settlement from the at-fault party if you sustained severe injuries or a disfigurement. Generally, settlements are not taxable at the federal and state levels. The Internal Revenue Service clarified this in Form 4335, while Michigan’s Taxpayer’s Guide exempts settlements from taxes.
Under the IRS and Michigan’s rules, you will not pay tax for compensatory damages, including pain and suffering, lost wages, medical bills, and emotional and psychological damages.
This is because the money received is not an income but a reimbursement of the amount already spent. However, if you agree to a confidential settlement, the entire amount may be taxable.
Replacement Services/Attendant Care Are Taxable
You will pay tax if you receive attendant care and replacement services. Attendant care is for people who cannot perform their daily tasks because of a disability. Settlement for replacement services and attendant care are taxable because they are considered income to the person doing the services.
Other Cases of Taxable and Non-Taxable Settlements
Disability benefits received by a guardian on behalf of an injured person are not included in the gross income, so they are not taxable. But you might have to pay the IRS tax if you receive exemplary damages. This is because the IRS views exemplary damages as punitive damages.
Finally, suppose you are a federal worker and took an itemized deduction for medical expenses on your federal income taxes in the previous year and are later reimbursed for those costs in a personal injury lawsuit settlement. In that case, you’ll have to pay taxes on the amount you claimed earlier as a medical expense deduction.
Remember that tax laws are constantly changing, so speak with our car accident lawyers and your tax advisor to know what part of your settlement is taxable.
Is My Car Accident Settlement Taxable FAQs
Regarding your settlement, it is normal to have many questions about how taxation will affect it. The following are some of the questions we frequently encounter:
Do Taxes Affect My Car Accident Settlement?
Taxes only affect your exemplary damages if you are paying federal tax. But you generally won’t pay tax on your compensatory damages.
Will I Pay Tax for My Insurance Benefit?
No. Michigan no-fault rules do not require you to pay taxes on your benefits.
How Long Does It Take to Get My Settlement?
There is no specific time frame for when you’ll get your settlement, as it depends on your case facts and the willingness of the other party to settle.
Will I Pay Tax Before Receiving Car Accident Settlement?
No. You only pay tax after receiving your settlement, and the payment is for taxable damages like replacement services.
Contact Us to Learn About Settlement Taxation
Settlement taxes can be confusing, but you don’t have to worry. Our car accident lawyers at Goodman Acker P.C. will advise you about the federal and state tax implications. We can also help you obtain a favorable outcome and protect your rights during the claim process or lawsuit.
Call 248-286-8100 to speak to one of our lawyers.
Compensatory Damages Are Not Taxable
In Michigan, you are entitled to a settlement from the at-fault party if you sustained severe injuries or a disfigurement. Generally, settlements are not taxable at the federal and state levels. The Internal Revenue Service clarified this in Form 4335, while Michigan’s Taxpayer’s Guide exempts settlements from taxes.
Under the IRS and Michigan’s rules, you will not pay tax for compensatory damages, including pain and suffering, lost wages, medical bills, and emotional and psychological damages.
This is because the money received is not an income but a reimbursement of the amount already spent. However, if you agree to a confidential settlement, the entire amount may be taxable.
Replacement Services/Attendant Care Are Taxable
You will pay tax if you receive attendant care and replacement services. Attendant care is for people who cannot perform their daily tasks because of a disability. Settlement for replacement services and attendant care are taxable because they are considered income to the person doing the services.
Other Cases of Taxable and Non-Taxable Settlements
Disability benefits received by a guardian on behalf of an injured person are not included in the gross income, so they are not taxable. But you might have to pay the IRS tax if you receive exemplary damages. This is because the IRS views exemplary damages as punitive damages.
Finally, suppose you are a federal worker and took an itemized deduction for medical expenses on your federal income taxes in the previous year and are later reimbursed for those costs in a personal injury lawsuit settlement. In that case, you’ll have to pay taxes on the amount you claimed earlier as a medical expense deduction.
Remember that tax laws are constantly changing, so speak with our car accident lawyers and your tax advisor to know what part of your settlement is taxable.
Is My Car Accident Settlement Taxable FAQs
Regarding your settlement, it is normal to have many questions about how taxation will affect it. The following are some of the questions we frequently encounter:
Do Taxes Affect My Car Accident Settlement?
Taxes only affect your exemplary damages if you are paying federal tax. But you generally won’t pay tax on your compensatory damages.
Will I Pay Tax for My Insurance Benefit?
No. Michigan no-fault rules do not require you to pay taxes on your benefits.
How Long Does It Take to Get My Settlement?
There is no specific time frame for when you’ll get your settlement, as it depends on your case facts and the willingness of the other party to settle.
Will I Pay Tax Before Receiving Car Accident Settlement?
No. You only pay tax after receiving your settlement, and the payment is for taxable damages like replacement services.
Contact Us to Learn About Settlement Taxation
Settlement taxes can be confusing, but you don’t have to worry. Our car accident lawyers at Goodman Acker P.C. will advise you about the federal and state tax implications. We can also help you obtain a favorable outcome and protect your rights during the claim process or lawsuit.
Call 248-286-8100 to speak to one of our lawyers.