Is a car accident settlement taxable income?
A car accident settlement is not taxable income in Michigan for an injured victim who receives income for pain and suffering, medical bills and most lost wages. But the payments for No-Fault attendant care services in a settlement are taxable to those providers.
What determines whether a pain and suffering settlement or a No-Fault settlement will be taxable?
The most important factors to consider when trying to determine whether a car accident settlement is taxable income are:
- What is the nature of the claim that the settlement is resolving?
- Who is receiving payment under the conditions of the settlement?
When an attorney meets with his or her client after a car accident, it is important to discuss tax ramifications. Bottom line, people want to know if there car accident settlement is taxable income because of the money they recover for pain and suffering compensation or for the payment of any No-Fault benefits they receive from their own insurance company.
Is a car accident settlement for pain and suffering taxable income?
Generally speaking, no a car accident settlement for pain and suffering is not taxable income in Michigan. That includes any monetary compensation for a person’s injuries and for their pain and suffering. This is also true for any pain and suffering compensation recovered as a result of jury verdict.
However, there are a couple very important caveats to this general rule:
- First, if your attorney agrees to make your car accident settlement confidential, this may make the entire settlement amount taxable.
- Second, it is always important to remember that our tax laws and the Michigan No-Fault law could change. Just last year, in 2019, Michigan saw the biggest changes to our auto No-Fault law since 1973, so if you are reading this blog at any time in the future, you should always talk to your injury attorney, tax adviser, and/or CPA, to make sure the law has not changed and you are in full compliance.
Is PIP taxable?
If we are talking exclusively about No-Fault PIP medical benefits (which pay for a car accident victim’s accident-related medical expenses), then the answer is “no.” PIP is not taxable.
This is true whether the payments are made regularly as medical expenses accrue or whether they are made as part of a settlement for unpaid, overdue benefits.
Are payments for No-Fault attendant care services tax free?
No. In regards to car accident settlement taxable income, the payments that providers of No-Fault attendant care services receive from auto insurance companies must be treated as taxable by those attendant care providers (though they may not be subject to FICA or FUTA taxes).
Attendant care is taxable whether the payments are made regularly as the bills for attendant care services accrue or whether they are made as part of a larger settlement for unpaid and overdue benefits. They are also taxable whether the payment is made directly to the injured claimant or to the people providing attendant care services.
Importantly, this “car accident taxable income” rule also applies to family members who provide in-home attendant care to family members to loved ones injured in car accidents.
The position that most CPAs take on the taxability of attendant care payments is that these are payments are considered income to the person providing the attendant care services and therefore taxable to that person. I do want to note here that there are attorneys and CPAs on both sides of this issue. Therefore, it’s essential that if you are an attendant care provider that you consult with a CPA or tax attorney.
Are payments for No-Fault replacement services tax free?
No. The payments that providers of No-Fault replacement services receive from auto insurance companies is considered taxable to those providers. These payments may not be subject to FICA or FUTA taxes.
This is true whether replacement services payments are made regularly as submittals for replacement services are made to the insurer, or whether they are made as part of a settlement for unpaid, overdue No-Fault benefits, or whether they are part of a trial verdict for No-Fault benefits.
Also, as with attendant care benefits, I encourage replacement service providers to consult with a CPA and/or a tax attorney before filing their taxes.
Is wage loss replacement taxable income?
No. The income received for No-Fault wage loss replacement is not taxable income under Michigan law. Because wage loss is taxable, your wage loss benefits are reduced 15%, leaving you with wage loss payments that represent 85% of your wages. (MCL 500.3107(1)(b))
This is true whether wage loss payments are made monthly, as part of a total settlement for unpaid and overdue PIP benefits, or as part of a trial verdict for No-Fault benefits.
However, there is an important caveat here. If you are so injured from a car accident that your tort claim includes your attorney claiming “excess” wage loss benefits because you will remain disabled beyond the statutory three years of No-Fault wage loss coverage, then the proceeds from this 3rd party tort settlement is treated as income that will be taxed. As part of a third-party tort settlement, taxes should include social security and Medicare taxes.
Finally, if you are a high-wage earner and your monthly wage loss exceeds the monthly maximum, the amount of wage loss that exceeds the monthly maximum is also taxable.
Are payments of disability benefits to a guardian tax free?
Disability benefits received from a car accident settlement 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 and, thus, they are not treated as taxable income.