Is a Lost Wage Benefit Payment from an Auto Insurance Settlement Considered Taxable Income?

If you've been involved in a serious accident, you could be entitled to a substantial settlement from your auto insurance provider. Although they may take months or even years to be disbursed, auto insurance settlements tend to work out well for injured drivers. In many cases, the value of the settlement can exceed the driver's medical costs, repair expenses and lost wages by a significant margin. If it can be proven that the auto insurer in question engaged in deceptive practices, drivers might even be able to secure punitive damages as part of the settlement. This typically requires the assistance of a lawyer and may necessitate a lengthy legal process. Such an inconvenience may be worthwhile: Depending upon the severity of the plaintiff's injuries, a successful punitive damage campaign could produce a windfall of tens of thousands of dollars.

Your auto insurance settlement will consist of several distinct parts. First, you'll be reimbursed for your medical expenses. These may include costs related to your emergency-room visit, overnight hospital stay, screenings, treatments and follow-up exams. Any ongoing physical therapy costs are liable to be included in this portion of your settlement as well. If you can prove that you suffered "psychological harm" or "mental anguish" as a result of your accident, your therapy costs may be added on too.

You'll also be reimbursed for the damage to your vehicle. This is the simplest part of your settlement: You'll either be issued a check for the resale value of your totaled car or paid the value of the appraised damages. In either case, this portion of your settlement shouldn't produce much controversy.

The third and fourth portions of your settlement are liable to be far more controversial. If you suffered a serious injury that prevents you from fulfilling your job duties, you may be entitled to "lost wage" compensation. If your injury is deemed to be permanent, you may be entitled to ongoing disability compensation as well.

The calculations that govern the issuance of lost-wage and disability compensation can be very complex. In general, they require your insurer to estimate the financial impact of your injury over its expected duration. For instance, an injury that causes you to lose 50 percent of your "working capacity" for one year may entitle you to 50 percent of the wages that you would have earned during that period. If your disability is judged to be permanent, you may also receive a sizable one-time payment. In both cases, these benefits are taxable.

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