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Question for the Money Doctors

Question submitted on Mar 15, 2013.

Question

Hi,

If I was in a car accident and received a settlement from my insurance company, would the lost wages part of the settlement be taxable?

Also, if I received a settlement for "pain and suffering," is that taxable?

Thank you.

Answer

If compensation for lost wages and pain and suffering was received on account of a personal injury, it is not taxable. In its techniques guide for lawsuits, awards and settlements, the IRS provides the example of a car accident where someone is injured and receives compensation for lost wages and pain and suffering. It concludes that pain suffering damages are excludable from gross income. The recovery for lost wages is also excludable as being “on account of personal injuries,” as long as the lost wages resulted from time in which the taxpayer was out of work as a result of injuries. You can see details at http://www.irs.gov/Businesses/Small-Businesses-&amp-Self-Employed/Lawsuits,-Awards,-and-Settlements-Audit-Techniques-Guide#_Toc305586651


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