If you've recently received or are anticipating a settlement from a car accident in Ohio, it's natural to wonder whether you'll owe taxes on that money. While a settlement can provide much-needed financial relief after a serious accident, it's important to understand the tax implications so there are no surprises during tax season. The answer to whether your car accident settlement is taxable depends largely on the nature of the compensation received and how it is categorized under state and federal tax law.

General Tax Guidelines on Settlements

The Internal Revenue Service (IRS) provides general rules on the taxation of legal settlements. Typically, the IRS divides compensation into two broad categories: taxable and non-taxable. Compensation for physical injuries is usually not taxable, while damages awarded for things like lost wages or punitive damages may be taxable.

Ohio generally follows federal tax rules when it comes to personal injury settlements. However, a few state-specific considerations and the way a settlement is structured can impact what must be reported to the IRS and Ohio Department of Taxation.

Types of Settlement Compensation and Their Tax Treatment

To determine if your settlement is taxable in Ohio, it's essential to break it down into its components. Not all parts of a car accident settlement are treated equally for tax purposes.

1. Compensation for Physical Injuries and Medical Expenses

Under IRC Section 104(a)(2), compensation for physical injuries or physical sickness is not taxable, provided the injuries stem from the accident itself and were not claimed as deductions in previous tax years.

This includes:

• Emergency room bills
• Surgery
• Physical therapy
• Prescriptions
• Medical equipment

However, if you deducted those expenses on your taxes in a prior year under itemized deductions, the reimbursement might become taxable under the IRS's "tax benefit rule."

2. Lost Wages

Lost wages are typically taxable, just as your regular income would be. The IRS and the Ohio Department of Taxation treat lost income as a replacement for what you would have earned had you not been injured, making it subject to both income and employment taxes.

If your settlement includes lost wages, your attorney or the settlement agreement should break out that portion separately for accurate reporting.

3. Property Damage

Compensation for property damage—such as repairs or the total loss of your vehicle—is usually not taxable as long as the payment doesn't exceed the adjusted basis (i.e., the vehicle's fair market value before the accident). If you receive more than the car was worth, however, the excess amount might be considered taxable income.

4. Emotional Distress and Mental Anguish

Damages awarded for emotional distress or mental anguish are treated differently depending on their origin. If the emotional distress stems directly from a physical injury, the compensation is generally non-taxable. If it's unrelated to physical harm—say, the trauma of the accident without any physical injury—it could be taxable.

According to IRS Publication 4345, damages for emotional distress not originating from physical injuries are taxable and must be included in your gross income.

5. Punitive Damages

Punitive damages are designed to punish the defendant rather than compensate the victim. These are fully taxable under federal tax law, regardless of the nature of the underlying claim. If awarded, you must report them as income, and they may be subject to a higher tax rate.

Note: Punitive damages are rare in Ohio car accident cases unless the at-fault party acted with gross negligence or malicious intent, such as in a DUI-related crash.

6. Interest on Settlement

If your settlement accrues interest from the time of judgment to payment, that interest is taxable, both federally and by the state of Ohio. It's generally treated as interest income and must be reported on your annual tax return.

Reporting Requirements and Documentation

Proper documentation is key when preparing your taxes after a settlement. A well-drafted settlement agreement should clearly itemize each component—medical costs, property damage, lost wages, and any other categories—so you and your tax professional can determine which parts, if any, are taxable.

Ohio residents must also comply with state tax rules, and while most personal injury settlements are exempt, taxable portions such as lost wages and punitive damages must be reported on both federal and state returns.

Statistics: Car Accidents and Settlements in Ohio

According to the Ohio State Highway Patrol, there were more than 70,000 injury crashes in the state in 2023. The Ohio Department of Insurance also notes that the average bodily injury liability claim in the state exceeds $18,000, with more serious injuries commanding settlements well into six figures.

Given the potential size of some settlements, even a portion deemed taxable could significantly impact your income for the year. Planning ahead can help you avoid unexpected tax bills or penalties.

Tips to Minimize Tax Burden

• Work with your attorney to structure the settlement clearly, allocating amounts to non-taxable damages where appropriate.
• Keep detailed medical records and receipts, especially if you deducted medical expenses in past years.
• Consult a tax professional familiar with Ohio tax law to ensure accurate reporting and minimize your liability.

If you're expecting a significant settlement, you may want to set aside a portion of the funds to cover any potential tax liabilities. Failing to do so could lead to underpayment penalties or issues with the IRS.

Conclusion

In Ohio, whether your car accident settlement is taxable depends on the type of compensation you receive. Payments for physical injuries and medical bills are generally tax-free, while lost wages, punitive damages, and interest are usually subject to taxation. Understanding the nuances of settlement tax treatment can save you from surprises during tax time. To ensure compliance and minimize potential tax exposure, it's wise to involve both a personal injury attorney and a qualified tax professional when structuring your settlement.

Need Legal Help? Brandon J. Broderick, Attorney at Law is One Phone Call Away

Navigating Ohio personal injury claims can be challenging. Fortunately, you don't need to do it alone. The experienced personal injury lawyers at Brandon J. Broderick, Attorney at Law, are available 24/7 to help you understand your legal options, gather necessary evidence, and build a strong case to secure the settlement you deserve.

Contact us now for a free legal review.