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Are Car Accident Insurance Settlements Taxable in New Mexico?

September 28, 2021

If you sustain an injury caused by the actions of another driver in New Mexico, you should be able to recover various types of compensation for your losses. This can include coverage of your medical bills, lost income, property damage expenses, pain and suffering losses, and more. But will your car accident settlement be taxable at the state or federal level? Here, our team of Alburquerque car accident lawyers want to discuss the tax implications of car accident injury settlements in New Mexico.

What Does the IRS say About Taxes on Injury Settlements?

We want to turn directly to the Internal Revenue Service (IRS) regulatory language when it comes to discussing whether or not settlements and judgments are taxable. In part, 26 C.F.R 1. reads that:

§1.104-1 Compensation for injuries or sickness.

  • (c) Damages received on account of personal physical injuries or physical sickness—(1) In general. Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2). Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care (described in section 213(d)(1)(A) or (B)) for emotional distress.

Compensation Received for Medical Expenses

Most vehicle accident settlements and judgments in New Mexico will be only for “special†and “general†damages. These categories of damages are meant to compensate individuals for their medical bills, lost income, and pain and suffering losses that arise as a result of their injuries.

In a typical settlement where a person receives only compensation for their physical injuries and medical bills, this will typically not be subject to taxes. That is because this type of settlement is meant to reimburse injury victims only for their out-of-pocket losses.

Compensation Received for Vehicle and Property Damage

Property damage expenses are also considered part of the “special†damage umbrella, and any compensation received to repair a vehicle or other property damaged in a vehicle accident is not taxable. This will be true for the cost of repairs that were already paid as well as any reimbursement a person received for a rental vehicle that they needed while their car was in the shop.

Compensation for Lost Wages

The exception to tax-exempt settlements and judgments typically falls with reimbursement of lost income. In most cases, any settlement or judgment amount received to reimburse a person for their lost wages is subject to income tax.
The reasoning behind this is fairly clear. A settlement or judgment designed to pay someone for the income they cannot receive while they are recovering would have been taxable had they not suffered the initial income loss. Any compensation intended to replace this same income should be taxable at the same level.

This can get confusing, particularly if a settlement or judgment includes lost income in an overall settlement or judgment amount included with medical bills and property damage expenses. However, individuals must still differentiate between the amount used for lost wages so that they can pay taxes on that portion.

What About Punitive Damages?

In rare cases, punitive damages are awarded in a New Mexico vehicle accident claim. These damages are typically reserved for cases where the actions of the defendant were extraordinarily reckless or intentional. Punitive damages are meant to punish the defendant and to deter future bad behavior. In the rare circumstance where punitive damages are awarded in a vehicle accident claim, you need to know that these damages are almost always taxable.