How a pain and suffering settlement and a No Fault settlement for attendant care will affect your tax bill
Tax season is in full swing. And people want to know how certain No Fault PIP benefits they may recover from their own No Fault insurance after a car accident will affect their taxes.
The first thing to do is to separate out what kind of money you’re receiving. Remember, if you were injured in a car accident in Michigan, you have two cases. The first type is a first-party case (or lawsuit), that involves Michigan No Fault insurance benefits that are paid according to the Michigan No Fault law. This can include attendant in-home nursing care and replacement services, as well as lost wages and medical mileage reimbursement.
The second case would be a case for pain and suffering. This is also commonly referred to as your third-party tort case, because you have sued a third-party (the person who caused your auto accident) for compensation for your injuries.
Here’s the (blessedly) short answer to your tax concerns:
- Your pain and suffering settlement is tax-free. OK, I’m a lawyer, so I have to put in a couple legal caveats, but you probably were expecting this. If you agree to a confidential settlement, this may make the entire amount taxable. Also, remember that tax laws and the Michigan No Fault law could change if you are reading this blog in the future, so always talk to your attorney, tax adviser or CPA to make sure about the current state of the law.
- Your No Fault wage loss is also tax-free, because it has already been reduced to 85% under the Michigan No Fault law.
- What about if you’re receiving No Fault replacement services and/or attendant care? Attendant care is also known as nursing care. Your No Fault replacement services and attendant care are considered income to the person doing the services, and so they are taxable (but attendant care may not be subject to FICA taxes or FUTA taxes). It’s important to also state upfront regarding the taxability of attendant care services in Michigan that there are currently some attorneys and CPAs on both sides of this issue. I’ve litigated this issue in my own cases and I personally believe that both No Fault replacement services and attendant care are considered income to the person providing the services, and so they’re both taxable. Please make sure to run this by your own CPA and attorney before filing your taxes.
- Disability benefits received by a guardian on behalf of an injured individual under a No Fault insurance contract for personal injury or sickness are not included in the gross income.
Hat tip to Gary Schwarcz from Couzens Lansky, a tax attorney in Farmington Hills, for his assistance with this blog post. Also of note: An excellent CPA that I’ve referred many people to on the issue of attendant care benefits and income taxes is Sandy Schecter at Rehmann.