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Taxes on claim recovery
If we are awarded a certain amount due to injuries received in an auto accident, do we have to pay taxes on it, and how much? We reside in the state of California.
Thank you very much.
This is a very good question. The answer is depends. There are different types of damages. See:
There is a big division on damages. There are General and Special damages. General damages are those that you cannot put a number on, they are objective on nature (i.e. pain and suffering, loss of quality of life, etc.) You do not pay taxes on those.
If you are compensated for Special Damages (i.e. damages you can put a number on, i.e. your medical bills) you also do not pay taxes on those, unless you are talking about loss wages. You would have to pay taxes on loss wages as if they were normal income. (Money you would have been earning if you were working, but was given to you because of the accident by the insurance company).
You would also have pay taxes on any punitive damages that are awarded to you.
In short: you pay taxed on loss of wages and punitive damages if any. Nothing else.
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