Winning a car accident settlement is always good news. But, things do not simply end there. You are likely wondering whether or not you have to pay taxes on your settlement money. It is not exactly a daily occurrence, you could be forgiven for not perfectly understanding the rules. Luckily, Wagner Reese, LLP is here to help.
Wagner Reese, LLP is an experienced Indiana law firm focused on personal injury cases, helping countless car accident victims gain the compensation they deserve. Along with decades of experience, eight of our attorneys have been named among the Super Lawyers® or Rising Stars lists. If you are unsure about your car accident settlement taxes in Indiana, none are better suited to helping you understand the ins and outs.
The details of these cases can be complicated, but with Wagner Reese, you will be totally in the know about every aspect. This guide will give you a better idea, or you can find out more about personal injury cases handled by Wagner Reese, LLP.
Explanation of car accident settlements in Indiana
A car accident settlement is the compensation money you receive from someone found responsible for your car accident. This can simply be offered fairly by their insurance company, or it can turn into a lengthy legal battle.
In either case, the most important aspect is finding the party responsible and proving they are liable. For example, if you find evidence at the scene that the driver was intoxicated, they may be held accountable and made to pay a settlement. A car accident lawyer is your best friend during this process, particularly if the other party chooses to fight.
In any event, once your case is won, you should begin receiving the settlement money either all at once, or in installments. If you have any questions, it is best to turn to a law firm like Wagner Reese, LLP, for legal advice on car accident settlements in Indiana.
Understanding Taxable Income and Tax Exemptions
Indiana has special tax rules that keep everyone paying the same flat rate. No matter your income, you pay 3.15 percent. However, almost every local county in Indiana imposes its own income tax, which has a fairly wide range. As an Indiana taxpayer, it is important to know your local tax rate based on where in the state you live.
If you were concerned about Indiana car accident settlement and taxes, you are in luck. There are a number of tax exemptions you can find, for a few reasons. Most damages in a car accident settlement in Indiana are tax-exempt, meaning the income you make from your settlement is yours to keep.
Factors Influencing Tax Liability on Settlement Amounts
Despite it being tax-exempt, there are a few tax implications of car accident settlements in Indiana. A settlement is made up of two types of damages: compensatory and punitive. Compensatory damages are typically tax-exempt, but punitive damages are not.
Punitive damages are uncommon and only apply to your settlement when a crime has been committed. They are an extra amount added in legal fines, and not all of it necessarily goes to you even as the plaintiff.
It can be difficult to understand how your settlement is split and how much you might have to pay taxes on. Wagner Reese, LLP can explain to you exactly how much of your compensation came from punitive damages, and thus how much of it you might have to pay.
IRS Regulations and Guidelines Related to Car Accident Settlements
The IRS is the federal side of taxation, separate from Indiana law or regulations. They handle federal income taxes, with their own rules for what is owed. The IRS tax code is just as important to understand as your state and local, even if they may be confusing.
However, car accident settlements are still not taxable income. Your settlement amount is likely safe from IRS taxation, though there can be exceptions.
Other benefits and income can be taxed, so reaching out for help is never a bad idea. A lawyer such as Wagner Reese can guide you through the complicated IRS tax rules, so you can better understand your finances.
Potential Tax Deductions for Medical Expenses and Legal Fees
Indiana allows a number of tax deductions. However, it does not allow itemized deductions for medical expenses. They do allow deductions for legal fees, but only if they relate to running your business.
The IRS does allow deductions for these things, in specific instances. For example, if you are hurt by someone, the legal fees to sue them are potentially tax deductible. This would cover a personal injury case, such as a car crash.
However, there are exceptions and complications in any of these cases. Speaking to a lawyer is your best bet to understand whether or not your expenses will be deductible.
Seeking Professional Advice from Tax Professionals and Attorneys
Your best option for understanding any financial situation is to reach out to a tax professional or attorney. Local, state, and federal agencies all have different rules for taxes and you have to follow each of them. These rules can be dense and difficult to understand, even when explained by the agencies themselves.
There are tax services all over the country that are more than happy to help you, whether it is filing your taxes or simply answering a question. When it comes to income gained through legal action, though, none is better than a good lawyer.
A law firm can help you understand how much you may make, and how much will be taxed before your case is ever filed. Explore the process of valuing your injury claim at Wagner Reese, LLP.
Addressing Common Misconceptions Surrounding Tax Obligations on Settlements
As you can no doubt see, there are a lot of what-ifs when it comes to tax obligations. There are some common misconceptions regarding tax implications of car accident settlements in Indiana, which do have an answer. Some believe that a settlement cannot be taxed until it is put into a trust account, but this is not true. If your settlement is taxable, it will be taxed as soon as you get it.
If you have any questions at all with such a complex topic, we encourage you to reach out to a professional. Wagner Reese, LLP has the experience and knowledge to help you out and has been serving Indiana for over two decades. Our founding partners have even been named among Indiana’s Top 25 Super Lawyers® and Best Lawyers®, with many other accolades for our work. We are waiting for you to call or fill out our online contact form.