Legal Question in Personal Injury in California
Are Settlements Taxable?
My question is two fold:
1. Are settlements received from an auto accident taxable (Federal and/or State)?
2. Are these types of settlements considered community property?
Thank you!
2 Answers from Attorneys
Re: Are Settlements Taxable?
These questions are more complicated than they seem and your lawyer who is handling your case (if you have one yet) may be able to advise you.
As a general rule damages that are based on a physical injury are tax exempt, while those that are not (pure emotional distress damages without physical injury, lost earnings) aren't. Wise personal injury attorneys will write settlement agreements so as to maximize the odds that the settlements will be tax-exempt. For example in a case where you are claiming for medical bills, pain and suffering, and lost wages, the settlement agreement might recite that the settlement is for your physical injuries and you are dropping or waiving your claim for lost wages (bzzt! taxable). The insurance company has no reason to care how your attorney chooses to characterize the damages, all they will usually care about is the amount on the check.
Similarly, whether the settlement proceeds are or are not community property can also depend on how the settlement agreement is worded. Wise personal injury attorneys consult with experienced tax and family law attorneys on these issues.
Re: Are Settlements Taxable?
No and No. That is the simple answer!!
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