After a serious Las Vegas car accident, your settlement should bring financial relief, not a new wave of stress about taxes. It’s a common and valid concern: Is this money considered taxable income by the IRS? Can you deduct your medical expenses?
The answers depend on how your settlement is structured—a crucial detail that an experienced personal injury lawyer like Jack Bernstein focuses on to protect your financial recovery. We’re here to provide the clear guidance you need. Jack’s got your back.
First Things First: Clarifying Your Tax Questions
When it comes to your accident settlement and taxes, the single most confusing part is that the common question—”Can I claim my reimbursement as a deductible?”—is actually two very different questions rolled into one.
To get you a clear answer, we first need to separate them. One question is about the money you received, and the other is about the expenses you paid.
Question 1: Is the Money I Received From My Settlement Taxable?
This is the “income” side of the equation. It asks whether the IRS views the settlement check you received as a profit or wage that you have to pay taxes on. The answer to this determines how much of the money you get to keep.
Question 2: Can I Deduct My Accident-Related Expenses?
This is the “expense” side. It asks whether the money you spent on things like medical bills and co-pays can be used to lower your overall taxable income for the year. This is what people typically mean when they talk about tax “deductions.”
Is Your Personal Injury Settlement Taxable by the IRS?
Now let’s tackle the first and most pressing question: Is the money you receive from your personal injury settlement considered taxable income? For most accident victims, the answer is a welcome relief.
The General Rule: Compensation for Physical Injuries is Not Taxed
The IRS does not typically tax payments you receive as compensation for a physical injury or physical sickness. The government’s view is that this money is not a profit or a wage; it is a reimbursement intended to “make you whole” again after you have suffered a loss.
This means the core components of your settlement are generally received by you, tax-free. This includes the funds allocated for:
- Your medical bills (past and future)
- Pain and suffering
- Emotional distress that stems directly from the physical injury
Exceptions: When a Portion of Your Settlement Is Taxable
While the portion for your physical injuries is protected, some parts of a settlement can be considered taxable income by the IRS. It is crucial to know what these are.
- Lost Wages. If your settlement includes money to compensate you for time you missed from work, that portion is generally taxable. The logic is that your regular paycheck would have been taxed, so this wage replacement is taxed as well.
- Punitive Damages. This is money awarded to punish the at-fault party for particularly reckless behavior. Because this goes beyond making you whole for your losses, the IRS views it as income to you and it is fully taxable.
- Interest. If your settlement takes a long time to be paid out and accrues interest, that interest is taxable income.
- Payments for Confidentiality. If your settlement requires you to sign a confidentiality or non-disclosure agreement (NDA), any money paid specifically for your promise of silence is usually taxable.
The Nevada Advantage: No State Income Tax on Settlements
Here is some good news for local residents. Even if parts of your settlement are taxable at the federal level by the IRS, Nevada has no state income tax. This means you won’t be hit with a second layer of taxes on any taxable portions of your settlement from the State of Nevada.
What About the Money I Received for My Car?
Similar to your medical payments, the money you receive for damage to your vehicle is also considered a payment to make you whole. Therefore, a settlement for your car’s repair costs or its actual cash value is generally not taxable. In rare cases where an insurance payout somehow exceeds the original cost basis of your car, that “gain” could be taxable, but this is not a typical outcome for most car accident claims.
Deducting Your Accident Expenses: The “No Double-Dipping” Rule
Now we turn to the second part of your question: Can you use the money you spent on accident-related costs to lower your tax bill? This is where the rules are very strict, and the simple answer for most people is no.
Why You Can’t Deduct Reimbursed Expenses
The fundamental principle is that the IRS does not allow a “double benefit.” Since your settlement for physical injuries is already tax-free, you cannot also use the expenses paid for by that settlement to get a second benefit in the form of a tax deduction.
A Simple Example:
- The settlement provides you with $10,000 designated for your physical therapy bills. This $10,000 is not taxed.
- You use that money to pay your $10,000 physical therapy bill.
- Because you were made whole by the tax-free settlement, you cannot then claim that $10,000 bill as a medical expense deduction on your tax return.
The Strict Rules for Deducting Unpaid Medical Bills
Even if you have medical expenses that were not covered by your settlement, it is still very difficult to deduct them. This is because the IRS has a high threshold that must be met.
Currently, you can only deduct the amount of qualified medical expenses that is more than 7.5% of your Adjusted Gross Income (AGI). For most families, their unreimbursed expenses do not reach this high level. It is important to note that this percentage can be changed by new tax laws, so you should always confirm the current threshold with the latest IRS guidelines.
Can You Deduct Your Attorney’s Fees?
This is a very common question. Generally, the answer follows the rules we’ve already discussed. You cannot deduct the legal fees that apply to the non-taxable portion of your settlement (the money for your physical injuries). For the parts of your settlement that are taxable (like for punitive damages), you may be able to deduct the portion of your legal fees that corresponds to earning that income. This can be complex and is a key question to discuss with a tax professional.
How Your Lawyer Can Help Protect Your Settlement From Taxes
Understanding these tax rules is important, but an experienced personal injury lawyer does more than just explain them—they can proactively structure your case to put you in the best possible financial position.
The Importance of How Your Settlement Agreement Is Worded
The language used in your final settlement agreement is critical. An experienced attorney will fight during negotiations to have the agreement clearly allocate as much of the settlement as possible towards non-taxable categories, like compensation for physical injuries and related pain and suffering. This creates a clear record for the IRS that is structured to be as tax-efficient as possible, potentially saving you a significant amount of money.
The Final Step: Why You Should Consult a Tax Professional
As personal injury attorneys, our expertise is in maximizing your settlement and ensuring the legal document is structured to your benefit. For specific advice on how to file your taxes after receiving a settlement, you must consult with a qualified tax professional, such as a Certified Public Accountant (CPA). They can review your specific financial situation and settlement details to ensure everything is reported correctly to the IRS. This is the final, crucial step in protecting your financial recovery.
A Clear Path Forward for Your Finances
The tax rules surrounding accident settlements can seem intimidating, but the core concepts are straightforward. Remember these key points:
- Compensation for your physical injuries is generally not taxable.
- You cannot deduct expenses that your settlement has already paid for.
- The way your settlement agreement is worded has a real impact on your finances.
By understanding these basics and seeking the right professional help—both legal and financial—you can navigate the aftermath of your accident with confidence.
