If you’ve received a car accident insurance settlement in Minnesota, you may wonder whether car insurance settlements are taxable. It’s wise to understand the tax implications of a settlement so you don’t end up with an unexpected tax bill.
In any car accident case, you should have a knowledgeable lawyer advise you on the specifics of your situation. An attorney who practices personal injury law should also be aware of the tax ramifications of a settlement. Whether you were a driver or passenger involved in an accident, you deserve sound legal advice so you can walk away with the financial resources you need to take care of yourself and move forward.
Overview of Car Accident Insurance Settlements in Minnesota
Insurance settlements are common in car accident cases. In many situations, fighting the insurance company in court doesn’t make sense. A good car accident lawyer can help you secure a settlement that adequately addresses all of your financial needs relating to the accident.
Types of Damages in Car Accident Settlements
A comprehensive car accident settlement should include damage —that is, compensation—for:
- Your property damage, including repairs or replacement of your vehicle and any contents lost in the accident
- Your medical bills resulting from the accident, including hospital stays, surgeries, clinic visits, casting, medical equipment such as crutches or braces, chiropractic care, physical therapy, and other medical services
- Your lost wages from work that you missed as a result of the accident
- Your pain and suffering, including physical pain and emotional distress
These damages can be divided into two categories:
- Economic or compensatory damages refer to reimbursement or payments for accident-related expenses. This category includes medical bills, lost paychecks, and property damage.
- Non-economic damages refer to the financial award you receive for your pain and suffering, emotional distress, and psychological trauma, even though those effects can’t be measured. This category also includes compensation for permanent impairments, scarring and disfigurement, the inability to participate in the activities you once enjoyed, and the decreased quality of tour life.
The insurance company usually calculates non-economic damages by multiplying your economic damages by a factor based on the severity of your injuries. Non-economic damages can sometimes include punitive damages, which aim to punish the at-fault driver for actions demonstrating extreme disregard for human life. Minnesota law allows juries to consider awarding punitive damages in drunk or intoxicated driving accidents.
Factors that Can Affect the Amount of a Settlement
Numerous factors can influence the settlement you can expect to receive, including:
- The extent of your injuries
- The extent of damage to your vehicle
- The value of the property you lost in the accident
- The physical and emotional pain you’ve experienced
- How much work you missed due to the accident
- The lasting impacts of the accident, including any ongoing impairments or disabilities
Minnesota is a no-fault state for auto insurance, meaning drivers must have a valid car insurance policy with certain minimum coverage. Under the no-fault law, you must submit a claim with your own insurance company first after an accident, regardless of who is at fault. Any settlement may ultimately depend on the policy limits of the coverage purchased by the drivers involved.
Minnesota also has a modified comparative negligence law, meaning you can recover compensation if you were less than 50 percent at fault for an accident. However, your compensation will be reduced by your share of the fault. For example, if the court finds you were 30 percent at fault, you can still recover 70 percent of your damages.
Taxability of Car Accident Insurance Settlements in Minnesota
Are insurance settlements taxable in Minnesota? The answer is generally no, with some important exceptions.
Types of Nontaxable Damages
Federal and state tax laws do not count as gross income the portion of car accident settlements directly related to a physical injury. That means you won’t have to pay tax on economic and non-economic damages such as:
- Medical bills
- Property damage
- Physical pain
- Emotional suffering tied to a physical injury
- Diminished quality of life due to the injury
- Physical impairments or disabilities resulting from the injury
While compensation for emotional distress resulting from your physical injuries is nontaxable, the same is not true for the reverse. Compensation for physical injuries that result from emotional distress—such as tension headaches, stomach ulcers, and insomnia—is subject to taxation.
The bottom line is that if your compensation is directly tied to the physical injury or property damage you sustained in the car accident, it is generally not taxable.
Does it Matter if You Receive a Lump Sum or Periodic Payments?
For tax purposes, it doesn’t matter how your settlement is structured. Federal tax law states that damages tied to a physical injury are not taxed regardless of whether they are lump sum or periodic payments.
Exceptions to Non-taxability of Car Accident Insurance Settlements in Minnesota
What if you obtained tax benefits in prior years by itemizing your deductions for medical expenses? In that case, you must report and pay taxes on a portion of the medical part of your settlement. If those deductions spanned multiple years, you must allocate that portion pro rata to each of those years.
Car accident settlements are taxable to the extent that they include the following:
- Punitive damages, with rare exceptions
- Lost wages, if designated as such
Compensation for lost wages is subject to taxation because if you had earned that money by working, you would have paid taxes on it.
Requirements for Claiming an Exemption
Because car accident settlements for injuries and property damage are not considered gross income, you don’t need to take any action to apply for an exemption. You don’t need to report the nontaxable portions of the settlement to the IRS or the Minnesota Department of Revenue.
Will I get a Form 1099 for a Car Accident Settlement?
A 1099-MISC is a federal tax form for reporting miscellaneous income. It is issued by the person or entity that paid you that income. You will get a 1099 form from the insurance company for the portion of your insurance settlement designated as lost income resulting from the accident. If your settlement included punitive damages, the 1099 should include them.
You must file that form with your tax return, and the amount noted on the form will be treated as taxable income.
- The bulk of most car accident settlements isn’t taxable.
- The portions awarded for lost income and punitive damages are taxable, however.
- Special rules apply if you have itemized your medical expenses in prior years.
- Because of the intricacies involved in federal and state tax law, it’s important to work with an attorney who can give qualified tax advice.
Contact a Minnesota Car Accident Lawyer
If you were involved in a car accident in Minnesota, you deserve experienced legal representation at all stages of the process. Our award-winning legal team at Milavetz Injury Law P.A. can stand up for you and get the compensation you deserve.
We have many outstanding case results involving car accidents across Minnesota. You can count on our experienced car accident lawyers to work tirelessly in pursuing the full compensation you deserve. We can also address any questions you have about the taxability of your car accident settlement.
To get in touch, please fill out our online contact form or call 763-878-7978 to learn more about how we can help.