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Do I Pay Taxes on My Settlement?

June 27, 2022

The quick answer is no.

Michigan is a “no-fault” insurance state and, in most cases, victims are not required to pay taxes on their personal injury settlement. But there are some exceptions.

Typically, a personal injury payout isn’t considered taxable income in Michigan. That’s because the law generally doesn’t consider compensation for bodily injury to be taxable income. The primary factors to consider when trying to determine whether an auto accident settlement is taxable income are:

  1. Who’s recovering compensation under the settlement terms; and
  2. The reason for the compensation.

Pain and Suffering, Medical Bills, and Lost Wages

A personal injury settlement doesn’t count as taxable income in Michigan if the claim was for pain and suffering, medical bills, and for lost wages that are paid by your no-fault insurer. But payments for attendant care services aren’t taxable if paid to the injured party but are taxable if paid directly to those providing these services.

Attendant care involves assistance for those with disabilities to perform tasks of daily living that they can’t do themselves.

Emotional and Psychological Damages

The award for emotional and psychological damages is frequently an ongoing part of recovering from a serious car accident. Generally, these types of payouts aren’t taxable.

But if a plaintiff agrees to keep his or her settlement confidential, the entire award may be taxable unless they assign a specific value to that promise of confidentiality. As a result, the best method of handling those issues is to assign a value directly in the settlement paperwork. That way, those funds paid confidentiality would be taxable to the injured person.

Modified Comparative Negligence

Rember that the State of Michigan applies a modified comparative negligence rule. This means that a plaintiff can only receive compensation if he or she is found to be 50% or less responsible for the accident. Plus, whatever degree of fault is attributed to the plaintiff will reduce the settlement by that percentage.

The Payout Process for Michigan Personal Injury Settlements

Typically, the insurance company pays settlement agreements as a single lump sum. As such, the plaintiff can’t receive reimbursement for ongoing medical bills as they occur. The plaintiff’s personal injury attorney will review the plaintiff’s medical bills and estimate the amount it will cost for the plaintiff to recover or reach the point where he or she won’t need any more treatment.

Lost wages work the same way. An estimate is based on the likelihood of getting merit raises, cost of living increases, and other factors. The plaintiff’s attorney will estimate how much the accident victim would have likely made in the future if he or she worked until retirement. Factored into this is whether the victim has invisible injuries from a traumatic brain injury or loss of companionship, comfort, and support from a wrongful death case.

In wrongful death case, the amount of compensation will include funeral and burial expenses.

Contact Us

The Buchanan Firm proudly serves people all across Michigan, including major cities like Grand Rapids, Muskegon, Detroit, Lansing, Holland, St. Joe, and Ann Arbor, and rural towns such as Lowell, Ada, Fremont, Newaygo, Grand Haven, Rockford, and Cedar Springs.

We will meet you after-hours, at home or in the hospital, to accommodate you.

Contact The Buchanan Firm today!